Bank of Korea unanimously hikes 25bp; Nomura maintains terminal rate view at 3.25%

Overview

This report analyzes the policy implications of the Bank of Korea’s unanimous 25bp hike in July 2026. The Bank of Korea raised the policy rate to 2.75%, marking the first hike since January 2023. Nomura believes the statement confirms that the Bank of Korea remains in a hiking cycle and that the policy direction is hawkish, but the press conference stayed cautious on the follow-up pace, especially without clearly signaling a consecutive hike in August.

Core views

The core view is that the Bank of Korea still needs to continue tightening to address inflation and financial stability risks, but the pace of hikes will depend on incoming data. Nomura maintains its forecast for 25bp hikes in October 2026 and January 2027, with a terminal policy rate of 3.25%. The report also argues that if July inflation surprises to the upside, Seoul home prices continue to accelerate, and the KRW weakens again, the risk of an earlier August hike will rise; conversely, easing inflation driven by energy prices could reduce the urgency of consecutive hikes, though it may not end the broader tightening cycle.

Analysis framework

The report evaluates the Bank of Korea’s reaction function from six angles: the monetary policy statement, the governor’s press conference, growth and income data, the inflation path, financial stability indicators, and rates market pricing, and then further applies the analysis to a relative-value trade between Korea and Taiwan 5-year rates.

Methodology notes

• Macro policy analysisCentral bank reaction function analysis

  Data-dependent hiking path

  By observing how the central bank describes growth, inflation, exchange rates, home prices, and credit, the report judges the policy direction and the pace of subsequent hikes.

• Rates strategyRelative-value rates trading

  receive Sep-5y Korea vs. Taiwan

  By comparing differences in growth, inflation, and market pricing between Korea and Taiwan, the report maintains a 5-year receive position in Korea relative to Taiwan, with a confidence level of 3/5.

• Macro fundamentalsIncome spillover to inflation framework

  Semiconductor-driven income growth may push up domestic demand, wages, and services inflation

  The report highlights the divergence between Korea’s real GDP and real gross domestic income, arguing that whether the income windfall from improved terms of trade spreads to consumption and wages will affect the persistence of the hiking cycle.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KRW

  Policy and risk monitoring variable

  Strengths

  If inflation and financial stability pressures rise, further policy tightening could provide some support for the KRW.

  Weaknesses

  The report notes that KRW has been highly volatile recently, and renewed weakness would raise the risk of an August hike.

  Comparison

  KRW weakness is included as one of the triggers for further tightening by the Bank of Korea.

  Risks

  Renewed FX weakness could intensify imported inflation and financial stability concerns.

• Korea 5y swaps

  Rates strategy instrument

  Strengths

  Nomura believes the market is pricing in more hikes than its own forecast, while there are still concerns about Korea’s domestic demand and the labor market remains soft, so it maintains its recommendation to receive in 5-year rates.

  Weaknesses

  If inflation, home prices, and FX pressures continue to worsen, Korea rates may move higher still.

  Comparison

  Relative to Taiwan, Nomura maintains receive Sep-5y Korea vs. Taiwan.

  Risks

  An earlier August hike or a market repricing toward more hikes would hurt the performance of the receive trade.

• Taiwan rates

  Relative-value comparison asset

  Strengths

  A rebound in Taiwan’s headline and core CPI, along with solid economic growth, supports further upside in rates.

  Weaknesses

  Taiwan rates have already rebounded recently, leaving only moderate confidence in the relative-value trade.

  Comparison

  Relative to Korea, Taiwan has stronger upward momentum in rates, making it the hedge leg of the Korea receive strategy.

  Risks

  If Taiwan’s inflation or growth momentum weakens, the comparative advantage of the Korea-versus-Taiwan receive trade could decline.

• Korea real estate and household credit

  Source of financial stability pressure

  Strengths

  Not a direct investment recommendation target, but highly informative for the policy path.

  Weaknesses

  Rising Seoul home prices and rapid household loan growth are viewed by the Bank of Korea as financial stability risks.

  Comparison

  Compared with a pure energy-price shock, property and credit pressures are more likely to prolong the tightening cycle.

  Risks

  Further upside in home prices could push the Bank of Korea to hike earlier or faster.

Key data

• Current policy rate2.75%The Bank of Korea raised it by 25bp from 2.50%.
• Voting resultUnanimous support from 7 membersThere were no dissenting votes for this hike.
• Nomura terminal rate forecast3.25%Additional 25bp hikes are expected in October 2026 and January 2027.
• Probability of an August hike25%Nomura sees an August hike as a risk scenario rather than the base case.
• Bank of Korea May growth forecast2.6%The report says the central bank now sees upside risk to 2026 growth being significantly above the May forecast.
• 2026 core inflation forecast reference2.4%The statement suggests core CPI may come in above the May forecast.
• Q1 real GDP YoY3.8%Used to illustrate strengthening economic growth.
• Q1 real gross domestic income YoY13.2%Mainly reflects improved terms of trade driven by higher semiconductor export prices.
• Rates strategy confidence3/5Maintain receive Sep-5y Korea vs. Taiwan.

Impact & implications

For markets, the message of the report is that there is still upward pressure on Korea’s front-end rates, but rapid consecutive hikes are not the base path; market pricing of three to four hikes over the next year is above Nomura’s forecast for two hikes, so Nomura still prefers receiving on Korea’s 5-year swap point, using Taiwan as the relative-value comparison. From a macro perspective, improved semiconductor exports support not only growth but may also reinforce demand-side inflation through income, consumption, and wage channels.

Risks

• Higher-than-expected July inflation could prompt an August hike.
• Continued gains in Seoul home prices would intensify financial stability pressures.
• Renewed KRW weakness could increase imported inflation and policy-tightening risk.
• If income growth from semiconductor export prices spills over into consumption, wages, and services prices, inflation could become stickier.
• If the market continues to price in three to four hikes, volatility in Korea rates could affect the 5-year receive strategy.

What to watch

• Advance Q2 GDP release on July 23, 2026.
• July CPI inflation data around August 4, 2026.
• Weekly Seoul apartment price trends.
• KRW exchange-rate volatility.
• Growth in household loans, especially housing-related loans and other lending.
• Whether semiconductor export prices, terms of trade, and domestic income growth spread into consumption, wages, and services inflation.