South Korea’s consumer price index (CPI) for August rose by 1.7% from last year. This is lower than the expected 2.0% increase predicted by a Reuters poll. On a month-to-month basis, the CPI fell by 0.1%, unlike the expected rise of 0.2%. When we look at core CPI, which excludes food and energy, it increased by just 1.3% year-on-year. That’s down from July’s 2.0%, marking the slowest growth since August 2021. The drop in CPI is mainly due to a 13.3% decrease in telecommunication prices. This drop in telecommunication prices is linked to SK Telecom’s 50% discount on monthly subscription fees for 24 million customers after a data leak. As a result, the headline CPI hit a nine-month low, showing that telecom costs have less impact on the index. The August inflation data is softer than we expected, changing the outlook for the Bank of Korea’s policies. With the headline CPI at a nine-month low, the pressure for more interest rate hikes is reduced. This raises the possibility of a policy shift from the central bank sooner than we thought. However, we should be cautious. The significant price drop was due to a one-time 13.3% reduction in telecommunications, stemming from a major data leak at a single company. This doesn’t necessarily indicate broad economic weakness. The Bank of Korea is likely to focus on core inflation, which also showed a slowdown. This sign of disinflation is backed by other recent data showing economic weakening. South Korean exports, a major growth driver, dropped by 2.8% in August 2025, marking the third month in a row of decline. A similar trend occurred in early 2024 when global demand weakened, which led the Bank of Korea to pause its rate hikes despite inflation being above its target. Given this situation, we anticipate lower Korean interest rates in the coming weeks. We believe that entering fixed positions on 2-year Korean Won interest rate swaps (IRS) is a good trade, as the market will start to see a higher chance of a rate cut by the end of the year. This position can yield profits if rates fall or if the market lowers its expectations for future rates. Lower rates may also impact the Korean Won. We expect the USD/KRW exchange rate to rise from around 1,380. Buying USD/KRW call options with a three-month expiry offers a defined-risk way to benefit from a possible drop in the won’s value. This environment could be positive for South Korean stocks, as lower borrowing costs benefit businesses. We think the KOSPI 200 index may break through recent barriers. We can take advantage of this by buying out-of-the-money call options on the index, providing a cost-effective way to gain exposure to potential upsides.

here to set up a live account on VT Markets now