[Why&Next]With Focus Shifting to the Message Over Rate Decision, Key Issues for the Bank of Korea Ahead of This Month's Monetary Policy Meeting

Exchange Rate Drops to Around 1,430 Won, but "Authorities Remain Vigilant"
Nomination of New Fed Chair and U.S. Implicit Agreement on Investment Support a Stronger Won
Rising Concerns Over Real Estate... Need to Assess Impact of Supply Measures on M

"The base rate will remain at 2.50% per annum. The real issue is the message." With about four weeks left until this month's Monetary Policy Board meeting of the Bank of Korea, the market is paying more attention to the message that will be delivered rather than the rate decision itself. Compared to the January meeting, which was seen as a de facto signal of the end of the rate-cutting cycle, there is keen interest in how the Board members' three-month rate outlook and their sense of crisis regarding financial stability-such as the exchange rate and real estate-have changed.

Exchange Rate Drops Compared to January, but Authorities Remain Vigilant

In the market, concerns over the exchange rate have relatively eased, but worries about the real estate market have grown. Additionally, since the economic outlook to be announced alongside the meeting may see an upward revision of this year's growth forecast for Korea from the previous 1.8%, the Board is expected to maintain a hawkish (preference for monetary tightening) stance.

The exchange rate was a key reason for the decision to hold rates steady in January. Due to year-end foreign exchange authority intervention, the rate dropped to 1,429.8 won, but steadily climbed in the new year, reaching 1,477.5 won just before the January meeting. At the time, Bank of Korea Governor Rhee Changyong said, "We must remain highly vigilant regarding the foreign exchange market." This was due to a combination of a strong US dollar, weak Japanese yen, rising geopolitical risks such as the Iran and Venezuela situations, and continued overseas investments by residents. Although the exchange rate has since fallen compared to then, the Board is expected to remain cautious about the exchange rate.

Amid concerns over 'Sell America,' the US dollar has weakened, and with signs of US-Japan cooperation, the Japanese yen has strengthened, causing the won-dollar exchange rate to fall below its late January level. The January average dropped to 1,456.3 won, lower than November (1,460.4 won) and December (1,467.1 won) of last year. Recently, US President Donald Trump commented that a weaker dollar is "great," while Treasury Secretary Scott Bessent mentioned a strong dollar policy, denying US-Japan cooperation, resulting in mixed signals. On the 30th (local time), Kevin Warsh, former Fed Governor, was nominated as the new Chair of the Federal Reserve. He is known for advocating rate cuts and a reduction of the Fed's balance sheet. The market expects that if the new Chair tries to push for drastic policy changes alone, he will face internal resistance, making swift implementation unlikely.

In terms of trend, the market sees a stronger momentum for a weaker dollar and a relatively stronger won, but from the perspective of the foreign exchange authorities, the situation is not yet reassuring. Although the highest level of concern has subsided, the market remains highly volatile and must be closely monitored. In particular, every time the exchange rate drops, there is increased demand for dollars at lower prices, which supports the lower bound and exerts upward pressure. After falling to 1,422.5 won, the won-dollar rate closed at 1,439.5 won on the last day of January.

Therefore, in the message following the February meeting, it is expected that the Board will once again emphasize concerns about the so-called "poverty in the midst of abundance"-where there is ample liquidity in dollars in the market, but few are willing to sell-and the excessive level of the exchange rate relative to fundamentals. Amin Kwon, a researcher at NH Investment & Securities, said, "In last year's negotiations with the US, it was specified that if volatility in the Korean currency market becomes excessive, the timing and scale of investments in the US can be adjusted. Ultimately, as with the yen, the financial authorities' commitment to exchange rate stability and related measures are likely to continue under the implicit agreement with the US," he said. "Unlike at the end of last year, the National Pension Service has begun hedging against currency risk, so concerns about further exchange rate increases will persist."

Apartments are located near Gwacheon Station in Gwacheon City, Gyeonggi Province. Photo by Yonhap News

Rising Concerns Over Real Estate... Caution Over High Exchange Rate-Driven Inflation

In contrast, concerns about real estate have grown more pronounced compared to the January meeting. This is because the market, which had been subdued since the October 15 measures last year, is now showing increased price gains even in the outskirts of Seoul, triggering warning signs. According to the Korea Real Estate Board, the average apartment sale price in Seoul rose by 0.31% in the fourth week of January (as of January 26). The increase was 0.02 percentage points higher than the previous week (0.29%), marking the highest weekly gain in 14 weeks since the third week of October last year (0.50%), which was the highest since weekly data began in January 2013.

Buying inquiries continue to focus on popular areas such as those near subway stations, large complexes, school districts, and redevelopment zones, leading to more transactions at higher prices. Particularly, while prices are rising across all of Seoul, the Board is paying attention to the fact that significant increases have also occurred in areas outside the main districts, such as Gwanak-gu (0.55%), Seongbuk-gu (0.42%), and Nowon-gu (0.41%). The government is also monitoring the market response to the January 29 supply measures, which included popular areas like Yongsan and Gwacheon. However, it remains uncertain whether buyers' sentiment will subside, given potential challenges in coordinating interests with local governments and in the permitting process.

There is also likely to be renewed caution about inflation driven by a high exchange rate. While inflation has recently hovered near the target (2.0%) and factors such as falling international oil prices have been favorable for price stability, there are now expectations that the Board will issue warnings about rising import prices and related increases in the cost of living due to the high exchange rate. The key variable is the exchange rate. On this topic, Governor Rhee recently stated at the "Global Macro Conference" hosted by Goldman Sachs in Hong Kong, "Even if economic growth recovers to 1.8% or higher this year, the inflation rate is expected to remain at around 2.1%, close to the target (2.0%). However, if the exchange rate stays at 1,470 to 1,480 won for an extended period, we may need to raise our inflation forecast," he noted.

Visitors are selecting products at the imported fruit section of a large supermarket in downtown Seoul. Photo by Yonhap News

This content was produced with the assistance of AI translation services.