Seoul, South Korea – 2025/05/07: An overview of the Bank of Korea head office in central Seoul. The Bank of Korea (BOK) is the central bank of South Korea and the institution that issues the Korean won. Established in Seoul on June 12, 1950. (Photo provided by: Kim Jae-hwan/SOPA Images/LightRocket, Getty Images)
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South Korea’s central bank raised its benchmark policy interest rate on Thursday, the first increase since January 2023, as South Korea’s inflation rate gradually rises.
The Bank of Korea’s 25 basis point rate hike to 2.75% was in line with the median forecast of economists polled by Reuters.
The central bank said in a statement that the move was taken as inflation is expected to remain above the Bank of Korea’s 2% target “for a considerable period of time.” “Inflation is expected to remain high for some time as the effects of rising energy prices are felt over time.”
South Korea’s headline inflation rate in June was 3.2%, the highest level since 2023.
The central bank pointed to uncertainties about the exchange rate, the pace of recovery in domestic demand, and wage increases, but predicted that the headline inflation rate in 2026 would be 2.7%, with the core inflation rate “slightly higher” than its previous forecast of 2.4%.
The Bank of Korea said last month that the recent high performance bonus payments seen at some big companies in the IT sector could lead to broader wage increases, leading to upward pressure on inflation.
South Korea has also been affected by the steady depreciation of its currency. wonhad hit a 17-year low of 1,561.5 on June 5th. Earlier this month, the currency approached that milestone again, hitting 1,559 against the US dollar.
The won has appreciated this month, and the last trading price was 1,484.86 won against the dollar. “There is plenty of room for the won to appreciate in the future,” Bank of Korea Governor Shin Hyun-sung reportedly said in the Seoul parliament last week, adding, “Currently, we are accumulating a very large current account surplus.”
Rising interest rates support the currency by attracting inflows from abroad.
Giving room for tightening monetary policy, South Korea’s economy expanded by 3.8% in the first quarter, marking the highest growth since the fourth quarter of 2021.
However, the latest rate hike comes amid turmoil in the Korean market, with benchmark volatility increasing due to swings in the semiconductor stocks of Samsung Electronics and SK Hynix. Kospi index.
Semiconductor makers Samsung and SK Hynix fell sharply, following the decline in U.S. semiconductor stocks overnight, and the Kospi fell more than 6%.
Gareth Leather, senior Asia economist at Capital Economics, said further tightening by the Bank of Korea is being considered.
Inflation is expected to remain above target and growth to remain strong for the remainder of the year, making further tightening likely, Leather said in a note after the announcement.
“Recent data suggests that the economy is well positioned to cope with rising interest rates,” he said, noting that South Korea’s exports rose 71% year-on-year in dollar terms in June, the fastest pace since 1978.
Although retail sales are down in real terms, which is a concern, he still expects growth to reach 4.0% this year, “above consensus.”
