2025/11/28 - BOK keeps rate steady, possible end of easing cycle

Korea

- BoK kept its benchmark interest rate (2.50%) unchanged at the November meeting. 
- Forecast for growth and inflation rate has been revised upwards. 2026 growth outlook to 1.8% from 1.6% projected in August. Reflecting strong exports and recovery in private consumption. 
- Market expectations for additional rate cuts have weakened severely and forward guidance also has shifted to a more hawkish stance. The number of members who voted for future rate cuts has been reduced every meeting since the last meeting.
- Much of the improvement in the growth outlook is driven by gains in semiconductors and IT, and if those sectors were stripped out, the underlying growth rate would be closer to about 1.4%. That suggests lingering risks related to the negative output gap, he said, explaining the stance of board members who remained open to another cut.

- Washington set a tariff rate of 15% on imports from Korea. While tariffs remain higher than they were before Donald Trump began his second term as president, the resolution of the talks cleared away some uncertainty for exporters. The deal also includes a provision for Korean firms to invest $350 billion in US strategic sectors.
- Korean companies continue to invest abroad, and retail investors’ appetite for US stocks remains strong. Both factors contribute to steady demand for dollars, heightening volatility in the foreign exchange market. 
- Housing also remains a key constraint on further easing. The BoK has repeatedly flagged financial stability concerns stemming from elevated household debt. Seoul apartment prices advanced for a 42nd consecutive week as of Nov. 17, despite three rounds of government measures meant to cool the market, including tighter mortgage limits, since President Lee Jae Myung took office in June.

 

 

Developed Market Government Debt

- Bond Investors Are Driving Governments Into Short-Term Debt

- UK and Japan are responding to investor demand to boost short-term borrowing, a shift in strategy that offers

governments lower interest payments but exposes them to potentially costly rates swings at the time of debt rollovers.

- The US is relying more on bills to fund its federal deficit, and countries such as Australia have floated similar policies. Globally, the average maturity of government bonds has fallen to the lowest since 2014.

- In both countries, central banks that spent years buying up bonds to boost the economy are withdrawing their support, reducing demand for longer-term debt and hiking government borrowing costs. With debt levels already high, policymakers are turning to shorter-term notes that come with lower yields but need to be rolled over more frequently — possibly into the teeth of higher interest rates.

- Rates might move higher and interest bill might suddenly increase in case of short term Government Bond roll-overs. 

- That’s making short-term borrowing much more attractive to governments. Gilts with maturities of fewer than seven years are expected to make up 44% of new issuance in the current UK fiscal year, a nearly 20 percentage point increase compared to 2015-16. In Japan, around 60% of new issuance would come from bonds maturing in five years or less this fiscal year, compared to 56% in fiscal 2015. 

Average Maturity of Government Debts

 

Operation Twist

The strategic increase in short-term Treasury issuance can complement an Operation Twist, type policy by expanding the supply of bills, which absorbs front-end demand and gives the Fed more flexibility to reduce its short-term holdings while directing its buying power toward the long end of the curve. This shift in issuance effectively reduces long-term supply relative to demand, enhancing the Fed’s ability to lower long-term yields—supporting cheaper borrowing costs for households and corporates. By keeping long rates anchored while funding needs are met through bills, policymakers can create conditions that encourage future investment and economic activity, thereby improving the outlook for an eventual cyclical recovery.

Operation Twist was used most famously by the Federal Reserve in 1961 and again in 2011–2012.
In 2011, during the post-Global Financial Crisis recovery, the Fed wanted to support the economy by lowering long-term borrowing costs—especially for mortgages and corporate financing- without expanding its balance sheet, which was politically sensitive at the time. To do this, the Fed sold about $400 billion of short-term Treasuries and simultaneously bought the same amount of long-term Treasuries, effectively pushing long-term yields lower while allowing short-term yields to rise or stay stable. Treasury issuance strategy also played a role: the U.S. Treasury maintained heavy bill issuance, which supplied the front end of the curve with enough liquidity to absorb demand while limiting long-end issuance, reinforcing the Fed’s effort to depress long-term yields. The combined effect helped stimulate housing, investment, and overall economic activity during a period of weak recovery.

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USD/KRW exchange rate: 1,467.62원

USD/JPY exchange rate: 156.18엔

USD/CNH exchange rate: 7.0721위안

EUR/USD echange rate: 1.1596달러

CNY/KRW exchange rate: 207.43원

DXY: 99.46

 

US Treasury 30Y yield: 4.671%

US Treasury 10Y yield: 4.019%

US Treasury 2Y yield: 3.491%

 

KTB 30Y yield: 3.244%

KTB 10Y yield: 3.307%

KTB 3Y yield: 2.901%

 

Where in What Form Shall we meet again, Whanki Kim