SEOUL, December 25 (AJP) -The Bank of Korea plans to take a cautious and data-dependent approach to monetary policy in 2026, as financial markets showed heightened volatility in December and capital flows continued to shift overseas, according to its latest policy statement and financial stability report.
In its Monetary Policy for 2026 report released Thursday, the central bank said it will decide “whether and when” to implement further base-rate cuts after comprehensively assessing inflation and growth conditions, as well as risks to financial stability.
While inflation is expected to remain near the target level, the Bank warned that upward pressures could intensify due to elevated exchange rates and a recovery in domestic demand.
Growth is projected to move toward its potential level of around 1.8 percent, but uncertainty remains high, reflecting risks related to the global trade environment, the semiconductor cycle and the pace of domestic demand recovery.
From a financial stability perspective, the central bank said it will continue to monitor housing prices in the Seoul metropolitan area, household debt and exchange-rate volatility.
Financial markets experienced notable fluctuations toward the end of 2025.
According to the Bank of Korea’s Financial Stability Report for December released earlier this week, equity prices rose sharply before showing increased volatility, while foreign-exchange markets remained sensitive to global conditions.
The central bank said it would strengthen monitoring of financial and FX markets and stand ready to implement market-stabilization measures if excessive volatility or herd behavior emerges. It also pledged to enhance cooperation with the government to address structural imbalances in foreign-exchange supply and demand and to improve market accessibility, including through reforms such as extended FX trading hours.
According to the report, both U.S. and Korean stock markets posted gains in September and October 2025. During that period, the KOSPI surged 28.9 percent, while the S&P 500 rose 5.9 percent. Despite the rally, individual investors moved in the opposite direction.
Domestic stocks recorded net selling of 9.9 trillion won in September and 6.8 trillion won in October, while overseas equity investment surged. In October alone, residents posted net purchases of $6.8 billion in foreign stocks, the largest monthly amount on record.
The BOK in the financial stability report said this reflected a strengthening substitution relationship between domestic and overseas equity investment. While domestic and foreign stocks had previously tended to move in tandem as complementary assets, recent patterns show investors increasingly reducing exposure to one market while expanding positions in the other.
The central bank attributed the shift largely to differences in long-term returns and exchange-rate expectations. According to the report, the 10-year moving geometric average return on the KOSPI has ranged from –0.7 percent to 5.6 percent since 2020, compared with 7.7 percent to 13.1 percent for the S&P 500.
As a result, expectations for long-term returns have remained relatively low for domestic equities but higher for U.S. stocks. When Korean share prices rise sharply above their long-term return trend, investors tend to view the gains as temporary and take profits. In contrast, rising U.S. equity prices are more likely to trigger follow-on buying, reflecting stronger long-term return expectations.
The baml also noted that expectations of a weaker won have reinforced the preference for overseas assets. A higher exchange rate increases the potential for exchange-rate gains on foreign investments, further strengthening the relative appeal of overseas equities.
Reflecting these dynamics, residents’ net overseas securities investment reached $117.1 billion in the January–October period of 2025, sharply up from $71.0 billion a year earlier. Of the total, equity investment accounted for $89.9 billion, while bond investment reached $27.2 billion, according to the central bank.
October marked a record high, with net overseas investment totaling $17.3 billion, driven by expectations of continued strength in U.S. equity markets, particularly in AI-related sectors, as well as expectations of future Federal Reserve rate cuts. The bank said the increase involved a broad range of investors, including the government sector such as the National Pension Service, financial institutions and individual investors.
Looking ahead, the Bank of Korea said it will continue to strengthen early-warning systems, stress testing and contingency planning to safeguard financial stability. It will also enhance liquidity support mechanisms for banks and non-bank financial institutions and improve the effectiveness of monetary policy transmission.
The central bank emphasized that policy decisions in 2026 will balance inflation control with financial stability, as volatile capital flows and exchange-rate movements play an increasingly important role in shaping domestic financial conditions.
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