"Growth Rate Sharply Upgraded to 3.3%" Bank of Korea Raises Base Rate Consecutively to 3.00% (Update)

0.25 Percentage Point Hike... Policy Rate Returns to 3% After 1 Year and 9 Months

Economic Growth Forecast Sharply Raised: 3.3% for This Year, 2.9% for Next Year

Consumer Price Inflation Maintained at May Projection of 2.7%

Preemptive Rate Hike in Response to Demand-Driven Price Pressures from Economic Recovery

On the 27th, the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points to an annual 3.00%. This is a back-to-back (consecutive) increase following last month. The decision prioritized factors such as the sharply revised upward economic growth forecast, continued inflationary pressures, and rising household debt. The Bank of Korea not only raised its economic growth estimate for this year significantly to 3.3%, but also revised next year's forecast upward to 2.9%, close to 3%. This reflects the view that the semiconductor sector's effect will outweigh downward pressures, driving Korea’s economic growth this year. The projection for consumer price inflation was maintained at 2.7%, unchanged from the previous forecast.

Shin Hyun-song, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 27th. Photo by Joint Press Corps

At the monetary policy meeting held at its headquarters in Jung-gu, Seoul, the Bank of Korea’s Monetary Policy Committee announced that the base interest rate would be raised to an annual 3.00%. Accordingly, the policy rate climbed back to the 3% range for the first time in 1 year and 9 months. This marks the third consecutive rate hike since the base rate system was introduced in March 2008. Previous consecutive hikes took place from November 2021 to January 2022 and from April 2022 to January 2023 (seven times in a row).

The decision for another back-to-back rise this month was influenced by stronger-than-expected growth and concerns over inflation. With the economic recovery potentially strengthening demand-side price pressures, policymakers determined that a preemptive rate increase was needed.

The second-quarter economic growth and gross domestic income (GDI) growth, which Governor Shin Hyun-song had emphasized he would watch carefully, strongly supported the rate hike. Real gross domestic product (GDP) grew 3.7% year-on-year, well above the Bank of Korea’s 3.0% forecast. Quarter-on-quarter growth (0.6%) also greatly exceeded the 0.2% projection. The year-on-year increase in GDI, an indicator of real purchasing power, reached 15.6% in the second quarter, surpassing the 13.2% of the first quarter—the highest since the first quarter of 1988. Surging demand for semiconductors, driven by expanded investment in artificial intelligence (AI), along with resulting price increases, improved terms of trade and fueled a sharp rise in exports.

The Bank of Korea’s revised economic outlook released today projected this year’s economic growth rate to reach as high as 3.3%. Yoon Yeo-sam, a researcher at Meritz Securities, commented on the hike, calling it a preemptive move to avert demand-driven inflation, considering not only the late-teen GDI growth and nominal GDP growth driven by the semiconductor upcycle but also the potential trickle-down effects they may induce.

Inflation indicators also supported the rate increase. The core inflation rate, closely tracked by Governor Shin, rose 2.6% in July—the biggest increase since December 2023. On a monthly basis, it climbed an additional 0.1 percentage point. While the overall consumer price inflation rate fell from 3.2% in June to 2.8% in July, it still surpasses the Bank of Korea’s target of 2.0%.

Market analysts interpreted the Monetary Policy Committee’s back-to-back rate hikes this month as an effort to preemptively stabilize inflation expectations and enhance policy flexibility going forward. Choyonggu, a researcher at Shinyoung Securities, said, "Even though consumer and cost-of-living inflation moderated in July, core inflation continued to climb. In addition, resilient semiconductor prices, robust export and current account figures, and a surge in overdraft balances—despite falling stock indexes—have all acted as factors supporting the rate hike." He also pointed out that inflation vigilance is heightened by upward pressure on import prices brought about by renewed geopolitical tensions in the Middle East.

From a financial stability perspective, a rapid rise in household loans and the increase in housing prices in the greater Seoul area were cited as additional reasons for the hike. The balance of household credit—which represents total household liabilities—reached 2,019.8 trillion won at the end of the second quarter, up 25.9 trillion won from the previous quarter. This is the largest quarterly increase since the third quarter of 2021. The rise in Seoul housing prices also accelerated. According to Korea Real Estate Board, the sale price of Seoul apartments rose 1.14% this month, a greater increase than last month’s 1.05%. Recent stock price corrections and a weak won currency are seen more as factors that could potentially affect the terminal interest rate, rather than as supporting factors for a rate freeze this month.

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