Bank of Korea raises rates sparking falls in Kospi and other risk assets

Today, the Bank of Korea (Bok) became the first central bank in Asia to raise rates after the Reserve Bank of New Zealand (RBNZ) was forced to defer its interest rate hike last week.

The Bok has been grappling with taming an asset bubble while supporting the economy during the latest virus outbreak. The vaccination rate in South Korea is very similar to New Zealand's and not too dissimilar to Australia's. About 26% of South Korea's population has been fully vaccinated, and 52.7% of its population has received their first vaccine shot.

In a statement accompanying its decision to raise rates by 25bp to 0.75%, the BoK said it would "gradually adjust" its level of support for the economy while considering the virus outbreak, financial imbalances, and inflation. 

The Bank of Korea raised its 2021 inflation forecast from 1.8% to 2.1%, above target. While their GDP forecast for 2022 was kept unchanged at 3.0% vs. its 3.0% projection from May. How the South Korean economy and asset prices respond to the tightening will be keenly watched by other central banks in the region, some of who are juggling similar quandaries. 

The decision to raise rates appears to have caught some market participants off guard. The South Korean stock index, the Kospi, has reversed lower to be trading down -0.75% at 3123 and ushered in "risk off" sentiment across other regional equity markets and growth currency pairs. 

Technically there is a band of horizontal support at 3100 that the Kospi needs to hold to avoid the selloff extending towards last week's 3049 low. On the topside, a band of horizontal resistance sits at 3170/90, which is likely to cap rallies in the short term. 

Kospi Index Daily Chart

Source Tradingview. The figures stated areas of August 25th, 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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