SEOUL, SOUTH KOREA – 2025/05/07: General view of Bank of Korea headquarters in central Seoul. The Bank of Korea (BOK) is South Korea’s central bank and the issuing institution of the Korean won. It was founded on June 12, 1950 in Seoul. (Photo by Kim Jae-Hwan/SOPA Images/LightRocket via Getty Images)
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South Korea’s central bank raised its policy rate on Thursday, raising it for the first time since January 2023 as inflation in the country rises.
The Bank of Korea’s 25 basis point hike in rates to 2.75% was in line with average estimates from economists polled by Reuters.
The move comes as inflation is expected to remain above the BOK’s 2% target “for a long time,” the central bank said in a statement. “Inflation is expected to remain high for a long time as the impact of rising energy prices continues over time.”
Headline inflation in South Korea in June rose to the highest since 2023, coming in at 3.2%.
The central bank flagged uncertainty over the exchange rate, the pace of recovery in domestic demand, and wage growth, while forecasting inflation in 2026 at 2.7% and core inflation to be “somewhat higher” than its previous forecast of 2.4%.
The BOK last month said the payment of large performance bonuses recently seen at large companies in the IT sector could lead to wider wage increases, turning upward pressure on inflation.
South Korea is also affected by the price drop wonwhich touched a 17-year low of 1,561.5 on June 5. Earlier this month, the currency again approached that milestone, hitting 1,559 against the US dollar.
It has strengthened this month and was last trading at 1,484.86 against the dollar. BOK Governor Shin Hyun Song reportedly told parliament in Seoul last week that “there is a lot of room for the winners to strengthen going forward,” adding that “we are currently accumulating a lot of cash balances.”
High rates support currencies by attracting foreign inflows.
Providing an environment for tighter monetary policy, South Korea’s economy grew by 3.8% in the first quarter, its strongest growth since the fourth quarter of 2021.
The rate hike, however, comes amid a turbulent period in South Korean markets, as a shift in semiconductor stocks Samsung Electronics and SK Hynix, led to increased volatility in the benchmark. Kospi index.
The Kospi fell more than 6%, as makers Samsung and SK Hynix sank, following losses in US chip stocks overnight.
Further tightening of the BOK appears to be on the table, according to Gareth Leather, chief Asia economist, at Capital Economics.
In a note following the release, Leather said that since inflation is likely to remain above target for the rest of the year and growth is expected to remain strong, it is likely to tighten further.
“Recent data suggest the economy is in a good position to deal with higher interest rates,” he said, pointing out that South Korea’s exports rose 71% in June year-on-year in dollar terms, its fastest pace since 1978.
While retail sales are falling in real terms and are a concern, he still expects growth to reach “above consensus” of 4.0% this year.
