ING’s Min Joo Kang expects the Bank of Korea (BoK) to keep its policy centred on inflation stabilisation and financial stability, alongside resilient growth and rising price pressures. She forecasts March CPI inflation at 2.5% year on year, above the market consensus of 2.3%. Petrol prices are expected to rise despite a government fuel price cap and a further fuel tax cut. A sharp rise in import prices is also expected to add pressure to a broader range of goods prices.

Inflation Risks Remain Tilted Upwards

Higher energy prices for longer, along with supplementary budget measures, are expected to lift inflation risks in the coming months. This keeps the balance of inflation risks tilted upwards. Based on this outlook, a shift towards policy easing is expected to be delayed. The forecast includes a 25bp rate rise in July, under the new governor, Shin Hyun Song. Looking back to early 2025, we recall the expectation that resilient growth and rising prices would force the Bank of Korea into another rate hike. The forecast at the time pointed towards a potential 25 basis point increase in July 2025 due to inflation risks from energy costs. This view was based on the idea that the central bank would have to prioritize inflation over supporting growth. However, the Bank of Korea ultimately held its policy rate steady at 3.50% throughout all of 2025 and into this year. While inflation did prove sticky, peaking at 3.7% in August 2025, slowing export growth and concerns over the property market led the central bank to pause. This divergence from the predicted hike shows how financial stability concerns can override a purely inflation-focused mandate.

Market Implications For Rates

As of today, April 2, 2026, inflation remains a key concern, with the latest March CPI data coming in at 3.1%, stubbornly above the BoK’s 2% target. This persistent inflation, combined with the central bank’s continued hawkish tone, means that expectations for rate cuts are being pushed further out. Markets are now pricing in a very shallow easing cycle, if any, for the second half of this year. For derivative traders, this suggests that positioning for a “higher-for-longer” interest rate environment in Korea remains a viable strategy in the coming weeks. We believe paying fixed on short-dated Korean Won interest rate swaps (IRS) is an attractive trade, as it profits if the market continues to price out imminent rate cuts. This is especially true for the 1-year and 2-year tenors, which are most sensitive to near-term policy shifts. This outlook also implies that yields on Korea Treasury Bonds (KTBs) are unlikely to fall significantly. Traders should therefore be cautious about long positions in KTB futures and could consider shorting them on any rallies. The persistent inflation and hawkish central bank stance create a ceiling for bond prices in the near term. On the currency front, the hawkish BoK should theoretically support the won, but weak export data has kept the USD/KRW pair elevated, recently trading near 1,350. This creates a tug-of-war, suggesting volatility may rise in the pair. Using options, such as buying a straddle on USD/KRW, could be a way to trade this uncertainty without picking a specific direction. Create your live VT Markets account and start trading now.

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