Rate hike seen as strongest tool to support won as FX measures lose impact
BOK Gov. Shin signals tightening, says action should come 'before it's too late'
Bank of Korea (BOK) Gov. Shin Hyun-song speaks during the 2026 BOK International Conference at the bank's headquarters in Seoul, June 1. Yonhap
Korea’s financial authorities appear to be running out of options to stem the continued weakening of the won, with analysts on Friday saying a benchmark rate hike is effectively the strongest tool left for policymakers.
Despite repeated verbal warnings from authorities and a rare joint inspection of banks’ currency operations, the won has remained under pressure against the U.S. dollar, prompting market participants to look beyond conventional intervention measures.
In recent weeks, the won-dollar exchange rate has hovered around the 1,500 level, putting the local currency at its weakest point since 2009 during the global financial crisis.
Last Monday, the Ministry of Finance and Economy and the Bank of Korea issued a rare joint warning that they would respond firmly to excessive volatility and one-sided market moves. At the time, the currency opened at 1,555.2 won per dollar — its weakest level in 17 years and three months — before recovering to close onshore trading at 1,535 won, an improvement of 4.1 won from the previous session following the verbal intervention. However, it still remained well above the 1,500 level.
Then on Wednesday, the BOK and the Financial Supervisory Service launched a joint inspection of domestic banks' foreign exchange operations, the first such move since 2010. Market watchers interpreted the move as a signal that authorities are stepping up efforts to curb speculative trading and closely monitor activity in the currency market.
But the efforts have failed to trigger a dramatic recovery for the won. On Friday, the currency opened stronger at 1,518 per dollar, strengthening 10.9 won from the previous session, and later closed onshore trading at 1,519.8 won.
Market watchers expect the won to stay under pressure in the near term.
"We expect the exchange rate to remain in the 1,500 range through the third quarter, before easing to around 1,470 by year-end and 1,420 next year, as there are few factors that could drive a sharp decline in the exchange rate in the short term," Park Jeong-woo, an economist at Nomura Securities, said during a media briefing in Seoul earlier in the day.
While authorities could intervene by selling dollars from foreign exchange reserves, analysts say such a move would be costly as it may prompt scrutiny from trading partners, particularly the United States.
Attention has therefore shifted to monetary policy, with higher interest rates seen as a potential way to support the won. Raising rates could help slow capital outflows and attract more foreign investment into Korean assets.
The central bank left its benchmark interest rate unchanged at 2.5 percent at its May 28 Monetary Policy Meeting, but adopted a hawkish tone that many analysts interpreted as laying the groundwork for tightening starting in July.
BOK Gov. Shin Hyun-song reinforced expectations of future rate increases on Friday.
"Monetary policy is inevitably subject to trade-offs among policy objectives, but such trade-offs are not significant at this time. Therefore, we need to prioritize price stability and raise interest rates without delay," he said in his remarks to commemorate the central bank's 76th anniversary.
Nomura Securities projected in its base-case scenario that the Bank of Korea would raise its benchmark interest rate three times by 0.25 percentage points each, bringing the policy rate to 3.25 percent. In a more severe scenario, Park said, the rate could climb as high as 3.75 percent.