The Bank of Korea (BoK) hiked its policy rate by 25bp to 2.5% today, in a move we had expected but which surprised the Bloomberg consensus. The economy should regain momentum over the next 12 months while inflation is likely to stay close to the ceiling of the target range. What’s more, the policy rate remains negative in real terms. Accordingly, we continue to expect a significant monetary tightening in 2011. This should lift the won even though more curbs on capital flows are imminent.
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