BOK hikes rates for first time in 3-1/2 years, signals more

Synopsis

South Korea's central bank has increased its benchmark interest rate for the first time in three years. This move aims to stabilize the currency and counter rising inflationary pressures. The bank anticipates further tightening of monetary policy in the coming months. Economic growth is expected to significantly exceed previous forecasts this year. Analysts predict at least one more rate hike before the year concludes.

South Korea's central bank raised its benchmark interest rate for the first time in three-and-a-half years on Thursday and flagged more to come, as brisk growth in Asia's fourth-largest economy fanned inflation risks.

The ‌seven-member monetary ⁠policy board ⁠at the Bank of Korea voted to raise the seven-day repurchase rate by 25 basis points to 2.75% to stabilise a slumping won and counter persistent inflationary pressure.

In a statement released shortly after, the bank also said the growth rate for South Korea is expected to "considerably exceed" the bank's May forecast of 2.6%, while inflation will remain high for "a considerable time."

"There are good reasons to expect further tightening over the coming months," Capital Economics economist Gareth Leather wrote in a note after the ⁠rate decision ‌was announced.

"Although the continued weakness in private consumption - retail sales are falling in real terms - remains a concern, we still expect growth to reach an above-consensus 4.0% ⁠this year."

The dollar-won rate remained muted on the widely expected decision. The benchmark KOSPI was off 7%, mostly due to renewed selling in chipmakers' stocks.

The economy has been rebounding faster than expected this year, thanks to a boom in semiconductor exports and investment, even as the local currency remains pressured, with the won weakening 3.4% against the greenback.

Gross domestic product expanded 1.8% in the first quarter, the fastest pace in nearly six years, prompting the government to raise growth forecasts to a five-year high of 3.0% for this year ‌on the back of a global semiconductor boom.

The rate hike aligns the BOK closely with regional neighbour the Bank of Japan, which recently raised its own benchmark rate to a 31-year high.

Central banks ⁠in Australia, New Zealand, Indonesia and the Philippines have also tightened their monetary policies.

With the headline inflation figure at a 2-1/2-year high in South Korea, a majority of analysts see the BOK delivering at least one more rate hike before the end of this year to take the policy rate to 3.00%.

Median forecasts showed the BOK would raise its key rate to 3.25% in the first quarter of 2027 and keep it there until at least the end of next year.

Governor Shin Hyun Song will hold a press conference at 0210 GMT, which will be livestreamed via YouTube.

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