The Bank of Korea raised its benchmark interest rate by a quarter percentage point to 3% on the 27th, the second straight monthly increase and the first time the policy rate has reached the 3% range in a year and a half, since February 2025.
"We judged that a pre-emptive monetary policy response was needed to promote stability in prices and the broader macroeconomy," BOK Governor Hyun Song Shin said, explaining the decision.
It was the first time in three years and seven months that the central bank has delivered back-to-back hikes, following January 2023, when prices were surging in the wake of COVID-19. Including this move, the BOK has raised rates in consecutive months only four times in its history.
"This consecutive increase was a departure from convention, and it sent a correspondingly strong signal to the market," Shin said. The remarks were read as signaling that early action beyond market expectations was needed to stabilize not only inflation, which has climbed into the 3% range, but also the won, home prices and household debt.
Stronger growth driven by semiconductors also underpinned the rate decision. The BOK lifted its forecast for South Korea's real gross domestic product growth this year to 3.3% from 2.6%, an upward revision of 0.7 percentage points. It also raised its projection for next year to 2.9% from 2.1% in May.
Shin was more cautious about the prospect of another increase later this year. "Because we have raised rates twice now, we need to see the effects," he said. "We expect the won to strengthen accordingly and import prices and inflation to stabilize as well." Analysts took the comments to mean the central bank will slow its pace at the remaining rate-setting meetings this year, in October and November, and consider a further increase in January or February. Board members' dot plot released the same day showed 3.25% as the most commonly cited projection for the policy rate six months from now, indicating that most members expect one more hike over that period.
The move into the 3% range also carries risks, as repayment pressure could mount for vulnerable borrowers. Some observers have voiced concern about a mismatch between the Lee Jae-myung administration's aggressive fiscal expansion and the central bank's tighter monetary stance.
