DBS Bank’s Group Research predicts that the Bank of Korea (BOK) will maintain its base rate at 2.50% until 2026. The report forecasts a decrease in January inflation due to reduced demand-side pressures and stable supply factors. The BOK has indicated that its rate-cutting phase has concluded, aligning this decision with the present economic conditions.
No Rate Hike Anticipated
The BOK has stated there is no immediate need to transition from cutting rates to increasing them due to low inflation levels. Consequently, the forecast remains that the BOK will keep the base rate steady at 2.50% for the remainder of this year. This forecast has been produced by FXStreet Insights Team using a combination of external market observations and additional insights.
The Bank of Korea has clearly signaled it is done cutting interest rates for now. We expect the base rate will remain steady at 2.50% throughout 2026. This creates a predictable environment for the Korean markets in the near term.
This stability is backed by cooling inflation, which we saw end last year at just 2.2% for December 2025. That figure is well within the central bank’s comfort zone and removes any pressure to hike rates. With economic growth still modest, the bank has little reason to change its current stance.
Market Responses and Strategies
This outlook suggests implied volatility on Korean assets should remain low. The KOSPI 200 Volatility Index (VKOSPI) has been trading in a subdued range, a trend we saw establish itself in the final quarter of 2025. This makes options strategies that benefit from stability, like selling straddles, appear more attractive in the coming weeks.
The bond market has already priced in this extended pause, with the 3-year government bond yield holding firm around 2.45% for months. This removes much of the guesswork from interest rate futures. Carry trades involving the Korean won could provide consistent, if not spectacular, returns against currencies with lower rates.
For the Korean won itself, this policy removes a key driver for large price swings against the dollar. The USD/KRW exchange rate found a stable footing after the BOK paused its rate cuts in August of last year. Therefore, setting up range-bound derivatives strategies on the currency pair could be a sensible approach.
