BOK Monetary Policy Committee: "Preventing the Spread of Inflation Is Key... Preemptive Rate Hike"

Full Statement from the August Monetary Policy Direction Meeting

On August 27, the Monetary Policy Committee of the Bank of Korea raised the base rate by 0.25 percentage points to 3.00% per annum, stating, "It is important to prevent the spread of rising inflation through a preemptive response."

In its statement on the monetary policy direction released that morning, the committee explained, "Six of the seven committee members supported the decision to raise the rate, with only Geonil Hwang dissenting."

Shin Hyun-song, Governor of the Bank of Korea, is attending the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 27th and is striking the gavel. 2026.08.27. Photo by Joint Press Corps

The Bank of Korea noted that, due to the robust performance of the semiconductor sector, the domestic economy is expected to maintain high growth rates both this year and next. The committee stated, "With continued strong growth in exports and investment and a gradual expansion of consumer recovery facilitated by improving income conditions, the economy will remain solid. Both this year and next year's growth rates are forecast to reach 3.3% and 2.9%, respectively, significantly surpassing the projections made in May."

Domestically, price stability concerns have increased, especially regarding core inflation, which excludes food and energy prices. The committee stated, "Going forward, inflation will remain above target for a considerable period, as the pass-through of previously elevated cost pressures continues and demand-side pressures increase because of improved income conditions. Consumer price inflation for this year and next is projected to be 2.7% and 2.3%, unchanged from the forecasts in May, but the core inflation rate is expected to reach 2.5% for both years, higher than the previous projections."

The committee also assessed that caution is required regarding financial stability, citing metropolitan area housing prices and household loans. The committee stated, "Housing prices in the Seoul metropolitan area have continued their rapid rise, and household debt has also increased substantially. Thus, from a financial stability perspective, close attention should continue to be paid to the continued increase in metropolitan housing prices and household debt."

The committee added, "Going forward, monetary policy will be managed to ensure that inflation stabilizes at the target level over the medium term, while also taking account of financial stability as we track growth trends. We will closely monitor trends in prices, the economy, and financial stability, and determine the timing and pace of further hikes accordingly."

The following is the full statement from the monetary policy direction meeting.

The Monetary Policy Committee has decided to run monetary policy by raising the Bank of Korea's base rate from its current level of 2.75% to 3.00% until the next policy decision. The domestic economy is showing stronger-than-expected growth due to robust exports and the recovery in domestic demand, while inflation is expected to remain above the target for a considerable period. Under these circumstances, it is important to prevent the spread of rising inflation through a preemptive response. As financial stability risks also require continued caution, the committee judged that a 0.25 percentage point increase in the base rate is appropriate.

Globally, while tensions in the Middle East persist, steady growth is being supported by robust AI investment. However, the inflation rate is expected to remain high for the time being, mainly due to rising energy prices. In the international financial markets, uncertainties remain over U.S. Federal Reserve policy and the Middle East situation. Concerns over fiscal soundness in major economies have increased, causing long-term government bond yields to rise and the U.S. dollar to weaken. Despite concerns over global AI investment profitability, stock markets generally rose on the back of strong corporate earnings. Going forward, global economic and financial market developments are expected to be influenced by the unfolding of the Middle East crisis, AI investment outlook, changes in major countries' monetary and fiscal policies, and international trade dynamics.

Domestically, growth remained strong, mainly driven by exports and investment. The number of people employed continued to rise modestly, particularly in the service sector. The outlook is for this positive growth to continue, supported by a strong semiconductor market, ongoing export and investment gains, and further improvement in consumer recovery on the back of improved income conditions. As a result, both this year and next year’s GDP growth rates are forecast at 3.3% and 2.9%, well above the projections made in May (2.6% and 2.1%, respectively). However, risks remain amid uncertainties over the strength of the semiconductor upcycle, the pace of domestic demand spill-overs, the Middle East crisis, and changes in international trade environments.

Regarding prices, consumer price inflation slowed to 2.8% in July, as the upward momentum in petroleum and agricultural, livestock, and fisheries product prices eased. However, the core inflation rate (excluding food and energy) increased to 2.6%, reflecting rising prices for personal services and durable goods. The short-term inflation expectations (among the general public) remained in the upper-2% range. Looking ahead, inflation will likely remain above target for a considerable period, due to the ongoing pass-through of accumulated cost pressures and growing demand-side pressures from improved income conditions. Both this year and next, consumer price inflation is projected at 2.7% and 2.3%, in line with forecasts from May. Core inflation is projected at 2.5% for both years, above the previous projections (2.4% and 2.3%, respectively). The inflation trajectory is subject to significant uncertainty related to international oil prices, exchange rate movements, the pace of domestic demand improvement, and the spread of wage increases.

In the financial and foreign exchange markets, major price variables have continued to show high volatility. The won-dollar exchange rate fell sharply, as the foreign exchange supply-demand situation improved due to reduced outflows of foreign stock investment funds and the weakening of the U.S. dollar. The yield on government bonds fluctuated significantly, influenced by the expansion of domestic economic growth, U.S. Treasury movements, and changes in global oil prices. Stock prices fell sharply in the semiconductor sector, followed by a partial rebound. Housing prices in the metropolitan area remained on a steep upward trend, while household loans saw a substantial increase.

The Monetary Policy Committee will continue to examine growth trends and manage monetary policy to ensure that inflation stabilizes around the target over the medium term, while remaining mindful of financial stability. The domestic economy is expected to continue its robust growth, supported by continued export and investment strength and a further consumer rebound, while inflation is projected to be above target for a considerable period due to the accumulated cost pass-through effect and increased demand-side pressure. Regarding financial stability, continued caution is warranted concerning the uptrend in housing prices in the metropolitan area and the increase in household debt. Accordingly, monetary policy going forward will be determined by closely monitoring developments in prices, economic activity, and financial stability, as well as determining the timing and pace of any further hikes.

Six members of the committee supported the decision to raise the base rate, while Geonil Hwang expressed the opinion that it would be preferable to keep the rate unchanged at 2.75%.

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