South Korean President Lee Jae-myung has directly cited a foreign investment bank’s forecast that the Bank of Korea’s benchmark rate could climb to 3.5% by the first quarter of next year, putting the bond market back on edge. While he did not explicitly call for a rate hike, his framing of rising rate potential as a variable that real estate speculators should heed has heightened wariness about additional monetary tightening.
On the 30th, the president shared a Morgan Stanley article on his X (formerly Twitter) account about an upward revision to South Korea’s growth forecast, stating: “Those interested in real estate speculation should pay particular attention to the section of the article below forecasting a Bank of Korea rate of 3.5% in the first quarter of next year, six months from now.”
He added: “The direction of interest rates is difficult to predict, but one must consider the level of U.S. rates, the rate relationship between South Korea and the United States, and the fact that the low growth that had been blocking rate normalization is being rapidly overcome.” At the same time, he drew a line on government intervention in rate decisions, emphasizing: “The government does not involve itself in interest rates, and is not permitted to do so.”
What the market is focusing on is the timing of the remarks. The Bank of Korea’s Monetary Policy Board raised the benchmark rate from 2.75% to 3.00% on the 27th, marking a second consecutive monthly hike. BOK Governor Shin Hyun-song described the move as a preemptive response to inflation and financial stability concerns, presenting a median forecast of 3.25% for the benchmark rate over the next six months. This implied a “gradual tightening path” of roughly one additional hike among the next four Monetary Policy Board meetings.
Immediately following the board meeting, market concerns about aggressive tightening had actually eased. Governor Shin noted at the time that “government bond yields fell slightly despite the back-to-back hikes,” assessing that the market had responded positively to the rate increase. Indeed, yields on 3-year and 10-year South Korean government bonds declined on the day of the meeting.
However, with the president re-emphasizing the possibility of a 3.5% BOK rate just three days later, concerns are emerging that government bond yields could face renewed upward pressure. Market attention is particularly focused on the fact that the president did not simply present 3.5% as a foreign investment bank’s forecast, but framed it as a factor that real estate speculators should heed. In the same post, the president also mentioned rising mortgage delinquency rates, increasing auction listings, and bid-to-cover ratios as factors warranting attention.
Some market participants interpret this as a message that runs counter to the “BOK put.” A central bank put refers to expectations that the central bank will support markets through rate cuts or other measures when markets falter. In this case, the president’s linkage of rate hike potential to real estate speculation warnings could be read as a signal that rate increases will not be ruled out in the process of stabilizing the real estate market. Some even suggest the government could adopt a policy framing that blames insufficient rate hikes for failing to rein in housing prices if home prices rise again.
The remarks are even more unusual when compared with the government’s previous messaging on interest rates. The government has typically expressed dovish views on rates, considering economic conditions and the interest burden on government debt. There is precedent from 2024, when Sung Tae-yoon, then presidential policy chief, remarked that “conditions are conducive to rate cuts,” prompting then-BOK Governor Rhee Chang-yong to draw a line, emphasizing that rate decisions are made independently by the central bank. This time, the president has done the opposite, directly citing the possibility of rate increases as grounds for warning against real estate speculation.
A senior financial sector official said: “The president did not order a rate hike, but he clearly presented the possibility that rates could rise further. Coming right after the BOK eased market concerns about tightening by signaling a gradual path, the market cannot help but worry that government bond yields could rise again.”
BOK’s Hawkish Stance Heading Toward a Critical Threshold
The difficulty the Bank of Korea faces in softening its hawkish stance also supports upward pressure on rates. The market has characterized the August Monetary Policy Board meeting as dovish, citing the gradual dot plot and the removal of the “rate hike stance” language from the monetary policy decision statement. However, based on the growth forecasts the BOK itself has presented, the hawkish stance evident since May is likely to persist.
At the May Monetary Policy Board meeting, a key indicator of the BOK’s shift was the addition of language to the policy statement noting that “demand-side pressures will also gradually increase and expand further.” This was because the May revised economic outlook significantly raised growth forecasts, pushing 2026 growth above potential output. In the revised outlook released on August 27, the BOK raised growth forecasts not only for this year but also for next year to levels above potential growth, further strengthening the hawkish justification.
Expanding Term Premium Driving Rates Higher
Another factor behind rising rates is the potential for further expansion of the term premium. In recent market rate movements, the term premium appears to be playing a more important role than Bank of Korea monetary policy. Notably, the term premium has been rising steeply since the middle of last year.
A key aspect of the term premium to watch is bond supply and demand. The government’s shift toward aggressive fiscal expansion to stimulate the economy, along with increased bond issuance, appears to have driven a rapid expansion of the term premium. While growth forecasts are rising sharply on the back of the semiconductor boom, the gap with domestic demand is widening, and perceived economic conditions are not keeping pace with headline indicators. As the government seeks to bridge this gap through active fiscal measures, it will not be easy to dispel market concerns about increased bond supply.
With large-scale capital investment driving economic momentum, it is perhaps natural that economic and market participants have become more sensitive to interest rates than before. In particular, rates have risen to levels that are pressuring investment in both the stock market and the real economy, making investors inevitably focused on the future direction of rates. Market rates have risen to burdensome levels in both South Korea and the United States, but it appears unlikely that rates will stabilize downward anytime soon. Rather, the assessment is that rates are more likely to continue rising toward a critical threshold.