Bank of Korea Raises Base Rate to 2.75% for First Time in Three and a Half Years (Update)

MPC Raises Base Rate by 0.25 Percentage Points to 2.75%

Inflation Far Exceeds Target; Semiconductor-Driven Growth Accelerates

High Exchange Rate Volatility; Caution Over Housing Prices and Household Debt

The Bank of Korea has raised its base interest rate to an annual 2.75%. With this decision, the Bank has shifted its monetary policy stance to tightening for the first time in three years and six months since the last hike in January 2023. This increase had effectively been signaled in advance. This is because inflation, economic growth, and financial stability, the three main factors the Bank of Korea closely monitors, were all pointing towards an increase. Now, market attention is focused on the timing and scale of the next rate hike.

Shin Hyun-Song, Governor of the Bank of Korea, attended the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 16th, and struck the gavel. Photo by Joint Press Corps

On the 16th, the Monetary Policy Committee of the Bank of Korea announced at a meeting held at the Bank’s headquarters in Jung-gu, Seoul, that it decided to raise the base rate by 0.25 percentage points (25 basis points) from its current level of 2.50%. This decision aligned with market expectations. In a prior survey of experts conducted by The Asia Business Daily, all 14 respondents predicted a rate hike this month.

Inflation was the key factor behind this interest rate increase. Consumer price inflation exceeded 3% in both May (3.1%) and June (3.2%), staying well above the target level of 2.0%; core inflation, which excludes food and energy, also remained in the 2.5% range. One-year inflation expectations among the general public were steady at 2.8% in both May and June. Meanwhile, the living cost inflation rate—which reflects perceived price levels—rose from 3.3% in May to 3.4% last month, the highest since April 2024 (3.6%). Governor Shin Hyun-song has previously stated that tightening was necessary because the living cost inflation rate has consistently exceeded headline consumer inflation since March.

Resistance to a rate hike eased as growth indicators were expected to improve significantly. In its economic growth strategy for the second half of the year, released on July 14, the government set this year’s economic growth rate projection at 3.0%—0.4 percentage points higher than the Bank of Korea’s May forecast of 2.6%. According to the International Financial Center, as of the end of last month, major global investment banks projected South Korea’s growth rate for this year to average 3.0%. Previously, Governor Shin indicated that the preliminary reading of real GDP for the first quarter was 1.8%, 0.1 percentage points higher than the advance estimate, suggesting even a mechanical upward revision to the annual growth forecast for this year was likely.

Concerns persist in terms of financial stability, particularly regarding the weakening of the won and overheating in the Seoul metropolitan area real estate market. The won–dollar exchange rate has hovered around the 1,480 won level for the first time in about two months, due to factors such as easing concerns over U.S. monetary tightening, expectations for currency conversion from SK hynix’s U.S. ADR proceeds, and reduced foreign selling of local stocks. However, there is still caution over exchange rate volatility, with the weekly closing price this month (as of 3:30 PM) rising as high as 1,555.8 won.

Worries about housing prices and household debt also remain. According to the Korea Real Estate Board’s June nationwide housing price survey, the average transaction price for all residential buildings (apartments, row houses, and detached houses) in Seoul rose by 1.03% compared to the previous month. Jeonse deposits and monthly rents also increased by 1.08% and 0.96%, respectively. Buying demand continued, particularly in areas undergoing reconstruction, large-scale complexes, and locations near subway stations. As a result, the balance of household loans at deposit banks rose by 7.6 trillion won at the end of last month compared to the end of May—the biggest monthly increase in one year and ten months since August 2024.

Experts forecast another rate hike during the remainder of the year, with October seen as the most likely timing. However, they also caution that the possibility of “back-to-back” hikes—another increase immediately in August following July’s move—cannot be ruled out.

This content was produced with the assistance of AI translation services.