Bank of Korea raises rates to 2.75% in first hike in over three years
SEOUL, SOUTH KOREA – 2025/05/07: General view of the Bank of Korea headquarters in central Seoul. The Bank of Korea (BOK) is the central bank of South Korea and the issuer of Korean won. It was founded on June 12, 1950 in Seoul. (Photo: Kim Jae-Hwan/SOPA Images/LightRocket via Getty Images)
Stick Pictures | Light Rocket | Getty Images
south korea central bank Raised benchmark policy rates On Thursday, it was increased for the first time since January 2023 as inflation in the country rises.
The Bank of Korea’s 25 basis point increase in interest rates to 2.75% was in line with the median forecast of economists surveyed by Reuters.
The central bank said the move comes as inflation is expected to remain above the BOK’s 2 percent target for a “significant period” in the statement. “Inflation is expected to remain high for a while due to the delayed effect of the increase in energy prices.”
Headline inflation in South Korea in June rose to its highest level since 2023 It is at 3.2%.
While the central bank states that there is uncertainty about the exchange rate, the pace of recovery of domestic demand and the increase in wages, it predicts that headline inflation for 2026 will be 2.7% and core inflation will be “slightly higher” than the previous estimate of 2.4%.
Last month, the BOK said the payment of large performance bonuses recently seen at some large companies in the IT sector could lead to broader wage increases, which could put upward pressure on inflation.
South Korea was also affected by the steady depreciation. to winIt reached its lowest level in 17 years with 1,561.5 on June 5. Earlier this month, the currency approached that milestone again, reaching 1.559 against the US dollar.
The won has strengthened this month and was last traded at 1,484.86 against the dollar. BOK Governor Shin Hyun Song reportedly said Last week, the Seoul parliament said “there is ample room for the won to strengthen going forward,” adding that “we are currently accumulating a very large current account surplus.”
Higher rates support currencies by attracting foreign inflows.
Making room for a tighter monetary policy, the South Korean economy grew by 3.8% in the first quarter, its strongest growth since the fourth quarter of 2021.
However, the rate increase comes at a turbulent time in South Korean markets as volatility in semiconductor stocks Samsung Electronics and SK Hynix led to increased volatility in the benchmark index. kospi index.
The Kospi lost more than 6% as chipmakers Samsung and SK Hynix fell, tracking losses in US chip stocks overnight.
Further tightening by the BOK appears to be on the table, according to Gareth Leather, senior Asia economist at Capital Economics.
In a note published after the announcement, Leather said further tightening was likely as inflation remained above target for the rest of the year and growth was expected to remain strong.
“The latest data show that the economy is in a position to cope with high interest rates,” he said, noting that South Korean exports increased by 71% on an annual basis in dollar terms in June, the fastest increase since 1978.
Although retail sales have fallen in real terms and are causing concern, it still expects growth to reach 4.0% this year, “above consensus”.
