KOSPI Retests 4,000 as BOK Raises Growth and Inflation Forecasts

The KOSPI index experienced a notable session, retesting the 4,000 level before closing 0.66% higher on the day at 3,986.91. The upward movement coincided with the Bank of Korea's (BOK) decision to maintain its benchmark interest rate, and a revised economic outlook.

The BOK's monetary policy board voted to hold the benchmark interest rate steady at 2.50% for the fourth consecutive meeting, aligning with market expectations. This decision reflects a delicate balancing act, as a weakening won limits the central bank's scope for further easing.

The central bank also revised its growth forecast for 2025 upward to 1.0%, and its inflation forecast to 2.1%. This adjustment signals increased confidence in the nation's economic trajectory, yet also highlights concerns regarding inflationary pressures.

Of particular importance was the BOK's shift in rhetoric. The previous statement's language indicating a continued “rate cut stance” was replaced with a more cautious approach: “the Board will decide whether and when to implement any further Base Rate cuts.”

This hawkish turn impacted the bond market, pushing December futures on three-year treasury bonds (KTBc1) lower. The BOK's stance aligns with a broader trend among Asia-Pacific central banks, including Japan, Australia, and New Zealand, which are also adopting less dovish positions.

The KOSPI's recent volatility underscores the complex interplay of domestic and global factors influencing South Korean equities. The index surpassed 4,000 points in late October, driven by strength in semiconductor stocks and inflows from foreign backers, closing at 4,042.83 on October 27th.

However, early November saw a decline below this threshold due to concerns about an AI bubble originating in the United States. This dip saw the index close at 3,953.76 on November 7th, reflecting a 1.8% decrease, and the impact of foreign backers sell-offs amid a strengthened won. The index rebounded on November 10th, reclaiming the 4,000-point level thanks to strong performances from major semiconductor companies like Samsung Electronics and SK Hynix, coupled with renewed foreign market interest.

Foreign backers have significantly influenced the market, with substantial net buying observed overall. However, periods of foreign sell-offs, often triggered by global concerns, have led to sharp declines. Institutional investors also contribute to the market's dynamic.

The BOK's Governor Rhee Chang-yong acknowledged the complexities of the situation, stating concerns about the potential impact of a weak won on domestic prices. He noted that businesses focused on domestic demand could be negatively affected, although the overall impact on the domestic economy remains somewhat unclear.

The central bank, having implemented four rate cuts since last year, faces a unique set of challenges compared to peers like the U.S. Federal Reserve. South Korea's economy is experiencing a consumption upswing while simultaneously grappling with a weakening currency, limiting the policymakers' ability to support growth without exacerbating inflation.

Today's retest of the 4,000 level, coupled with the BOK's revised forecasts and cautious stance, suggests a market navigating a period of delicate equilibrium, with future sentiment heavily reliant on continued economic growth and stable currency dynamics.