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Widening interest rate differentials between Korea and the rest of Emerging Asia will put upward pressure on the currency. Economists at Capital Economics expect the Korean won to significantly outperform other Asian currencies over the coming year.

Rate hikes coming in Korea as recovery gathers momentum

“If the recovery progresses as we expect, the central bank is likely to shift its attention away from supporting growth and towards containing financial risks. Low interest rates are feeding through to the fastest rise in house prices since 2007. Prices don’t look so stretched relative to incomes. But affordability is worsening across the country, and the central bank is becoming increasingly concerned.”

“We think the central bank will start raising interest rates at its final meeting of the year in November, with further rate hikes likely in 2022-23. Our forecasts are more hawkish than what other analysts are anticipating and what is being priced in by financial markets.”

“Policymakers are in less of a hurry to tighten elsewhere in Asia, and we expect most other central banks to leave rates unchanged throughout this year and next. In contrast, financial markets and other analysts are expecting many central banks to start tightening monetary policy in 2022.”

“If we’re right, a widening interest rate differential between Korea and the rest of Emerging Asia will put upward pressure on the currency. We expect the Korean Won to significantly outperform other Asian currencies over the next couple of years.”