Bank of Korea Governor Shin Hyun-song bangs the gavel at a Monetary Policy Board meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 27th. Joint Press Corps
The Bank of Korea raised its base rate by a quarter percentage point to 3.00% on the 27th, following a monetary policy board meeting. The move marks a back-to-back increase after the central bank lifted the rate last month for the first time in three years and six months. It is the first time the base rate has stood at 3% or above in one year and nine months, since November 2024.
The increase is the first consecutive hike since the end of the most recent tightening cycle. According to the BOK, consecutive rate increases have occurred several times in the past. The central bank raised the rate twice in a row in July and August 2007, and again in November 2021 and January 2022. This is the fourth back-to-back hike. In 2022, in particular, the BOK raised the rate seven consecutive times, in April, May, July, August, October and November, through January 2023.
In a survey of 20 experts conducted earlier by The Seoul Economic Daily, 65%, or 13 respondents, had forecast a consecutive increase in August.
Behind the latest hike were demand-side price pressures from a semiconductor boom, higher international oil prices stemming from the war in the Middle East, and a period of elevated exchange rates. The strength of the semiconductor cycle has lifted the growth rate, partly offsetting the drag on the economy from higher rates, which is seen as having supported the decision to tighten.
Economic data released since the previous board meeting came in stronger than expected. Real gross domestic product grew 3.7% in the second quarter from a year earlier, far exceeding the BOK’s projection of 3.0%. Real gross domestic income rose 15.6%, up from 13.2% in the first quarter and the highest reading since the first quarter of 1988.
The BOK also raised its growth forecast for this year to 3.3% from 2.6%, an upward revision of 0.7 percentage points. The revision reflects semiconductor exports rising far more than initially expected. Growth of 3.3% this year would be the fastest since 2021, when the economy expanded 4.7% on a low base from the COVID-19 pandemic. The central bank kept its consumer inflation forecast at 2.7%.
Household debt and the rising interest burden on vulnerable borrowers remain constraints on further tightening. Korea’s household debt topped 2,000 trillion won in the second quarter, and any further increase in lending rates could raise repayment burdens, particularly for borrowers on floating-rate loans. Floating-rate loans account for 57% of outstanding household loans, prompting concern that the effects of the base rate increase could be substantial.
The policy mix between expansionary fiscal policy and monetary tightening is another variable. The government plans to increase total spending next year by more than 10% from this year, to more than 800 trillion won, drawing on higher tax revenue from the semiconductor boom. If the spending increase stimulates domestic demand and prices, the BOK could face greater pressure to tighten further.
The gap between Korean and U.S. policy rates narrowed to 0.75 percentage points from 1 percentage point.