Will the South Korean stock market still hold up when the interest rate hike boots may finally drop next week, amid its bearish trend?

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The hawkish remarks from the Governor of the Bank of Korea combined with the onset of a technical bear market are pushing Korea’s capital markets to a tricky crossroads. The triple pressures of interest rate hike expectations, continued foreign capital outflow, and structural risks from leveraged ETFs are fermenting simultaneously, leaving this market—once highly sought after for its semiconductor boom—now facing a severe test.

On the 9th, Bank of Korea Governor Shin Hyun-song made clear comments, citing three factors—inflation overshooting, improved economic growth, and rising financial stability risks—and stated that "it is necessary to raise the benchmark interest rate at the appropriate time." The market widely expects that the Monetary Policy Committee meeting of the Bank of Korea, to be held on the 16th, will announce a rate hike, which would be the first since August 2021. After the news, the KOSPI index surged more than 4% in early trading but then plummeted, and the sharp reversal in market sentiment reflects investor disagreement and unease.

The current macro backdrop is not optimistic. The KOSPI has dropped more than 20% from its June high, entering a technical bear market. On July 7, program-driven sell orders and circuit breakers were triggered in one trading day, with Samsung Electronics and SK Hynix leading the decline. In the first half of the year, foreign investors’ net selling on KOSPI reached 148 trillion won. Against this backdrop, investors are seeking answers to whether a rate hike is a boost as a policy signal or an additional burden on a fragile market.

Shin Hyun-song Continues to Send Hawkish Signals; Path to Rate Hikes Becoming Clear

Since taking office in May, Shin Hyun-song has repeatedly stressed the necessity of raising rates, each time with clearer language. In his speech during the central bank’s founding anniversary on June 12, he said, "Priority should be given to price stability, and rate hikes should be promoted as soon as possible"; on the 17th, he said that policies would proactively stabilize prices.

At the parliamentary hearing on fiscal and economic planning on the 9th, Shin Hyun-song identified inflation as the core reason for raising rates and specified the sources of price pressure—not only the transmission of oil prices driven by the Middle East situation, but also the large performance bonuses by semiconductor companies and the wealth effect from the sharp rise in KOSPI, both of which are boosting consumer demand. "The inflation rate is expected to remain high for quite some time."

The Bank of Korea echoed this in its report to the National Assembly, stating, "Given the policy conditions such as inflation overshooting, improvement in growth momentum, and rising financial stability risks, it is necessary to raise the policy rate at an appropriate time." This is the institutional endorsement of the governor’s remarks.

Inflation Above 3% for Two Consecutive Months, Demand-Side Pressure Replacing Supply-Side

On the data front, the urgency for a rate hike is evident. In June, Korea’s consumer price index rose 3.2% year-on-year, far exceeding the central bank’s 2% target. The living cost index, which reflects daily costs, rose by as much as 3.4%. Price increases were around 2% in January–February, but surpassed 3% since May as the Middle East situation worsened, and have remained high since then.

Shin Hyun-song pointed out that first-half inflation was mainly driven by the transmission of international oil prices, i.e., supply-side shocks. However, he emphasized that the driving force of inflation is undergoing a structural shift—large bonuses at top semiconductor companies like Samsung Electronics and SK Hynix and the sharp rise in the KOSPI are expanding household assets, thus raising demand-side pressure. This means that even if energy prices fall, price pressures will be more persistent.

The Bank of Korea expects that falling oil prices will be offset by expanding demand-side inflation, and "the consumer price index will remain high."

Citi Expects Two Rate Hikes This Year, Two More Next Year

The market has reached a basic consensus regarding the outcome of the July 16 meeting. Citi economist Jin-Wook Kim expects the Bank of Korea will raise the policy rate by 25 basis points from 2.50% to 2.75% at next week's meeting, and signal a gradual pace of additional rate hikes.

Citi’s baseline forecast is: one hike in July, another in October, and two more in January and April next year. Jin-Wook Kim stated that he expects Shin Hyun-song to hint at raising rates by 25 basis points every quarter in the second half of 2026, while maintaining a data-dependent stance with no explicit forward guidance for the first half of 2027.

Citi also expects the central bank may highlight upside risks to the 2026 growth outlook, citing the upward revision to first-quarter GDP and resilient economic activity in the second quarter.

This path suggests the upcoming rate hike is not an isolated event but the start of a multi-step tightening cycle. For the already pressured stock market, rate normalization will exert sustained valuation pressure.

Stock Market Deep in Bear Territory, Triple Risks Brewing Simultaneously

Even before the expected rate hike, the Korean stock market went through a sharp correction. The KOSPI has dropped over 20% from its June high, entering a technical bear market; on July 7 it repeatedly triggered the sidecar and circuit breaker in one day, closing at 7,246.79 points.

Foreign capital flight is the primary source of pressure. In the first half of the year, foreigners net sold 148 trillion won of KOSPI shares; in the past two trading days, daily net sales exceeded 1.3 trillion won, concentrating on Samsung Electronics and SK Hynix. The logic is clear: KOSPI rose about 60% from April to June, while the Korean won depreciated from 1,200 to 1,566 in the same period, hitting a 16-year low—so currency losses for USD-based investors made profit-taking inevitable.

Leveraged ETFs constitute the second major risk. Fourteen 2x leveraged single-stock ETFs tracking Samsung Electronics and SK Hynix were listed at the end of May. On July 7, all plunged 12–13%. Thirteen out of the fourteen ETFs fell below their issue price of 20,000 won. Sixteen single-stock leveraged or inverse ETFs saw a combined turnover of 13.1 trillion won that day, more than a third of all ETF market turnover. Since Samsung Electronics and SK Hynix together account for more than half of the KOSPI market cap, daily rebalancing in leveraged ETFs triggers additional hedging sell orders, compounding downside pressure on the underlying shares and intensifying the overall market decline.

Concentration risk is a structural problem directly highlighted by the central bank. In its written report to parliament, the central bank warned that single-stock leveraged ETFs may induce excessive capital concentration in a few stocks and exacerbate market volatility through daily rebalancing.

Limited Policy Space, "Semiconductor Paradox" Remains Unresolved

What baffles the market is the sharp divergence between fundamentals and share prices. Samsung Electronics posted Q2 operating profit of 89.4 trillion won, with semiconductor demand structurally strengthened by continued global AI infrastructure investment. However, record profits are paradoxically accompanied by record-breaking selloffs.

The Bank of Korea has assessed that the semiconductor market shows stronger upward momentum than in previous cycles, but also points out that uncertainty about AI profitability, reduced actual investment by large tech companies, and energy bottlenecks are all potential risks.

The limitations of policy tools are also obvious. While rate hikes can help suppress inflation and support the won, higher rates put direct valuation pressure on a market already in a technical bear phase. The government’s stock market stabilization fund is about 10 trillion won, far less than the 148 trillion won net selling by foreign investors in the first half of the year.

Korean Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-chul said the government fully understands concerns about leveraged ETFs adding volatility, and related agencies are discussing ways to minimize volatility, but no concrete measures have yet been announced. An official from the Financial Supervisory Service also said regulators are considering stricter product trading rules, but "any regulatory adjustment would need to take a broad view of the market impact."

The rate hike decision on the 16th is already highly probable. The real variables are: once the tightening cycle begins, whether the won can stabilize, whether foreign capital outflows will abate, and whether leveraged products can achieve a soft landing—these three answers will largely determine if the Korean stock market can find a footing out of the bear market.

Risk Reminder and DisclaimerThe market carries risks; investments should be made cautiously. This article does not constitute personal investment advice and does not consider the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investing based on this is at your own risk. ```