"Next Year's Growth Rate Also Approaches 3%: Bank of Korea Raises Base Rate Consecutively to 3.00%" (Comprehensive)

0.25 Percentage Point Hike... Base Rate Returns to 3% After 21 Months

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

"Preemptive Action Needed to Prevent Spread of Inflation"

Majority of Committee Sees 3.25% Rate by February Next Year

"Further Hike Expected After a Pause in October"

On August 27, the Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points to 3.00% per annum. This marks back-to-back (consecutive) hikes following last month's increase. The decision reflected significant upward revisions to the economic growth outlook, persistent inflationary pressures, and a rise in household debt. The Bank of Korea not only sharply raised its growth forecast for this year to 3.3%, but also revised the growth projection for next year upward to 2.9%, close to 3%. This revision reflects the view that the positive impact from semiconductors will outweigh downward pressures on growth and bolster the Korean economy. The inflation forecast for consumer prices was maintained at the previous projection of 2.7%.

Experts believe these back-to-back increases set the stage for a pause at the next rate decision in October. However, further signals of additional rate hikes are clear. On this day, the committee showed through the K dot plot that the highest probability is for the base rate to reach 3.25% in the next six months (by February of next year), indicating that an additional increase is likely. Ultimately, analysts expect the rate will be raised further, but the timing of the next hike will depend on key indicators to be released in the future.

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 27th, striking the gavel. Photo by the Joint Press Corps

The Monetary Policy Committee announced on this day, at a meeting held at the main building of the Bank of Korea in Jung-gu, Seoul, that it raised the base interest rate to 3.00% per annum. This is a consecutive increase, following last month's 0.25 percentage point hike. As a result, the base rate has entered the 3% range for the first time in a year and nine months. The minority opinion in favor of holding the rate was given by Committee member Hwang Geon-il. Since the Bank of Korea switched from the call rate target system to the base rate in March 2008, this marks only the third time back-to-back hikes have been implemented. Previous consecutive increases took place from November 2021 to January 2022 and from April 2022 to January 2023 (seven back-to-back hikes).

The rationale for this month’s back-to-back hikes lies in the stronger-than-expected growth momentum and persistent inflationary concerns. The committee judged that, due to the sharp economic recovery, demand-side inflationary pressures could intensify and called for a preemptive response. In its statement, the committee said, "The domestic economy is maintaining stronger-than-expected growth momentum, supported by robust exports and a recovery in domestic demand, while the inflation rate is expected to remain above the target level for a significant period. Under these circumstances, preemptive measures are important to prevent the spread of inflation. As financial stability risks also require continued attention, we determined it appropriate to raise the base rate by 0.25 percentage points."

The second quarter GDP growth rate and Gross Domestic Income (GDI) increase, which Governor Shin Hyun-song had said he would closely monitor, became decisive grounds for the rate hike. In the second quarter, real GDP grew by 3.7% year-on-year, significantly surpassing the Bank of Korea’s forecast of 3.0%. Compared to the previous quarter, real GDP grew by 0.6%, far above the projection of 0.2%. The GDI growth rate, which reflects changes in real purchasing power, reached 15.6% year-on-year, higher than the first quarter’s 13.2%. This is the highest level since the first quarter of 1988. Explosive demand for semiconductors due to global artificial intelligence (AI) investments and resulting price increases improved the terms of trade and boosted exports.

This year’s economic growth rate is expected to reach 3.3%, 0.7 percentage points higher than the forecast released in May (2.6%). Yoon Yeo-sam, researcher at Meritz Securities, commented on the hike: "This is a preemptive increase aimed at curbing demand-side inflationary pressures, taking into account the high GDI in the upper tens percent range and the nominal GDP induced by the robust semiconductor sector, as well as potential trickle-down effects on investment and private consumption."

Inflation data also supported the rate hike. The core inflation rate, which Governor Shin emphasized, rose by 2.6% in July—its highest increase since December 2023. The increase was 0.1 percentage points higher than the previous month. While the consumer price inflation rate dropped from 3.2% in June to 2.8% in July, it still remained above the Bank of Korea’s target of 2.0%. Market analysts believe the committee aimed to stabilize inflation expectations early through consecutive hikes, thereby increasing policy flexibility moving forward. Cho Yong-gu, researcher at Shin Young Securities, said, "Not only the rise in core inflation but also resilient semiconductor prices despite falling stock indices, robust export and current account indicators, and the increased use of overdraft accounts and other credit all supported the rate hike."

From the perspective of financial stability, the rapid increase in household lending and rising property prices in the Seoul metropolitan area also contributed to the rationale for the hike. The total amount of household credit, which comprehensively reflects household debt, stood at KRW 2,019.8 trillion at the end of the second quarter, up by KRW 25.9 trillion from the previous quarter. This is the largest increase since the third quarter of 2021. Home prices in Seoul also rose sharply. According to the Korea Real Estate Board, Seoul apartment sales prices in August rose by 1.14%, an increase from 1.05% in July. Seok Byung-hoon, professor of economics at Ewha Womans University, said, "The increase in household credit was also significant compared to the previous quarter, and the government has doubled the total household lending limits for banks. For management of the household debt growth rate, raising the base rate was necessary." He also noted that the recent market correction in stock prices and the won’s decline to the 1,380 level are expected to act as factors affecting the terminal rate, rather than supporting a rate hold this month.

The committee considers the highest possibility is for the base rate to reach 3.25% by February next year, six months from now—a level that would require one more 0.25 percentage point increase. Based on the K dot plot system, where all seven committee members each mark three dots for projected interest rates six months ahead, 10 out of 21 dots (47.6%) indicated 3.25% as the expected base rate.

Another six dots (28.6%) predicted a base rate of 3.50% six months from now, which would require two additional hikes of 0.25 percentage points each. In contrast, only five dots indicated expectations for the current rate to be maintained six months later. Gong Dong-rak, researcher at Daishin Securities, said, "This dot plot is broadly in line with market expectations. There are no dots marking 3.75%, and the highest level is 3.5% with six dots, which aligns with most institutional forecasts of around 3.5%."

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