Federal Reserve's shift minimizes exchange rate risks, leading BOK to consider reducing interest rates in October.
The US Federal Reserve's recent rate cut in September has marked a significant turning point, restarting the global easing cycle, according to Lee Kyung-min, a strategist at Daishin Securities. This development is expected to have a positive impact on South Korea's stock market, the Kospi, which recently reached an all-time high.
The Fed's pivot was welcomed by markets, as the move is seen as a restart of the global easing cycle. The US-Korea policy rate gap has been reduced to 1.75 percentage points from a peak of 2 percentage points in May. This reduction has provided the Bank of Korea with more room to ease its policy in October, as currency risks recede and the policy gap with the US Fed shrinks.
The rally in the Kospi was led by large-cap semiconductor stocks, with investors betting that lower global rates would bolster corporate earnings. Economists see the odds of a reduction at the October meeting of the Bank of Korea rising, due to persistent weakness in demand and forecasts for GDP growth to remain below 1 percent this year.
However, Lee Kyung-min cautions that risks would build if the index extends further. At higher levels, it's time to manage short-term risks by trimming exposure to overheated sectors.
The Bank of Korea's key rate has maintained 2.5 percent since May, despite growth slowing to near-stagnation. Household lending in Korea rose 4.1 trillion won ($2.96 billion) from July, reversing a June slowdown. An economist at Shinyoung Securities predicts the Bank of Korea is likely to cut rates once in the fourth quarter, with October being the more probable timing.
The Bank of Korea remains worried about the property market, and a rate cut could potentially fuel further housing gains. Seoul apartment prices have climbed another 0.48 percent in August, extending a three-month rally. This could potentially push back the rate cut to November.
Several policymakers at the Bank of Korea have stressed the need to avoid destabilizing the won in minutes from their August meeting. This highlights the delicate balance the bank must maintain between stimulating growth and managing potential currency fluctuations.
Lee Kyung-min adds that "synchronized global easing will strengthen liquidity and growth expectations," which should be a key driver of the Kospi's bull run at least through the first half of 2026. However, he emphasizes that managing risks and maintaining a balanced portfolio will be crucial for investors in the coming months.
The rally followed an 11-day winning streak that briefly paused on Wednesday, underscoring renewed momentum for Korean shares. Individual investors offloaded a net 7.8 trillion won in shares, while foreign and institutional investors were net buyers of 2.8 trillion won and 4.3 trillion won, respectively.
Meanwhile, the European Central Bank (ECB) has announced an interest rate hike in October 2025, which is considered likely due to ongoing inflation pressures and economic adjustments within the Eurozone. This contrasts with the global easing trend, but underscores the complex and interconnected nature of global economies and monetary policies.
In conclusion, the global easing cycle restarted by the US Federal Reserve's rate cut is expected to have a positive impact on South Korea's stock market, the Kospi. However, investors must remain vigilant and manage risks, particularly in the property market and overheated sectors. The Bank of Korea's future monetary policy decisions will play a crucial role in shaping the Kospi's trajectory in the coming months.
