SEOUL, SOUTH KOREA – 2025/05/07: General view of Bank of Korea headquarters in downtown Seoul. The Bank of Korea (BOK) is the central bank of South Korea and the issuing institution of the Korean won. Founded on June 12, 1950 in Seoul. (Photo by Kim Jae-Hwan/SOPA Images/LightRocket via Getty Images)
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Central Bank of South Korea raising policy base rates on Thursday, increasing them for the first time since January 2023 as the country’s inflation rises.
The Bank of Korea’s 25 basis point hike, which pushed rates to 2.75%, was in line with the average estimate of 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 his statement. “Inflation is projected to remain high for some time as the impact of rising energy prices is lagged.”
South Korea headline inflation rises to highest level since 2023 in June by 3.2%.
The central bank cited uncertainty in the exchange rate, the pace of domestic demand recovery and wage growth, while forecasting headline inflation for 2026 at 2.7% and core inflation “slightly higher” than the previous forecast of 2.4%.
The BOK said last month that the payment of large performance bonuses seen recently at some large IT sector companies could lead to wider wage increases, leading to higher inflation.
South Korea has also suffered from a steady drop in the exchange rate wonwhich hit 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 last traded at 1484.86 per dollar. BOK Governor Shin Hyun-sung reported Last week, Seoul’s parliament said there was “a lot of room for strengthening the won in the future,” adding that “we are currently running a very large current account surplus.”
Higher rates support currencies by attracting foreign inflows.
Providing scope for tighter monetary policy, South Korea’s economy expanded 3.8% in the first quarter, the strongest growth since the fourth quarter of 2021.
However, the rate hike comes amid a turbulent period in South Korean markets, with swings in semiconductors Samsung Electronics and SK Hynix adding to the benchmark’s volatility. Kospi index.
The Kospi fell more than 6% as chipmakers Samsung and SK Hynix fell, tracking losses in U.S. chip stocks overnight.
According to Gareth Leather, senior Asia economist at Capital Economics, further tightening by the BOK appears to be on the cards.
In a note after the release, Leser said that with inflation likely to remain above target for the rest of the year and growth expected to remain strong, further tightening was possible.
“The latest data suggests that the economy is in a position to handle higher interest rates,” he said, pointing out that South Korean exports rose 71% year-on-year in June in dollar terms, the fastest pace since 1978.
While retail sales are falling in real terms and a cause for concern, he still expects growth to reach “above consensus” of 4.0% this year.