▲ Bank of Korea Governor Shin Hyun-song bangs his gavel during a plenary meeting of the Monetary Policy Board held at the BOK in Jung-gu, Seoul, on the 27th.
The Bank of Korea's Monetary Policy Board voted on the 27th to raise the base rate by 0.25 percentage points from 2.75 percent to 3.00 percent per annum.
Amid sustained high inflation and concerns that robust growth could further fuel price pressures, the BOK appears to have taken "preemptive action" by raising the base rate for two consecutive months, following the hike on July 16.
This marks the first time in three years and seven months that the board has implemented back-to-back rate hikes, since a streak of seven consecutive increases from April 2022 to January 2023.
It is also unprecedented to embark on back-to-back hikes immediately after initiating rate increases, signaling an accelerated tightening stance.
Consecutive hikes themselves are exceptionally rare, marking only the fourth time in history following July–August 2007 (two times), November 2021–January 2022 (two times), and April 2022–January 2023 (seven times).
Previously, the board focused on stimulating the economy by cutting the base rate a total of 1.00 percentage point across four occasions: October and November 2024, and February and May of last year.
Last year, a series of adverse events—including political uncertainty stemming from the emergency martial law situation, a domestic construction slump, and the shock of U.S. reciprocal tariffs—made monetary easing inevitable.
Subsequently, the board kept the base rate frozen for eight consecutive meetings while monitoring internal and external variables, as household debt continued to rise and the won-dollar exchange rate climbed.
Last month, as the economy rebounded sharply driven by robust semiconductor exports and inflation became unsettled by fallout from the Middle East situation, the BOK resumed rate hikes for the first time in three years and six months.
Going a step further, and judging that solid growth momentum will persist through next year, the board broke market expectations—which were more divided than ever between a rate freeze and a hike—to implement consecutive rate increases today.
Inflation showed a shaky trend as the Middle East war, which broke out in late February of this year, became prolonged.
International oil prices (based on Brent crude), which stood at the low 70 dollars per barrel right before the war, surged to the 120-dollar range in April before recently hovering around 90 dollars.
Consequently, the consumer price inflation rate climbed gradually from 2.0 percent in January and February of this year to 2.2 percent in March and 2.6 percent in April, before recording the 3 percent range for two consecutive months in May (3.1 percent) and June (3.2 percent).
Although it eased slightly to 2.8 percent in July, it still significantly exceeded the BOK target level of 2.0 percent.
In particular, core inflation, closely monitored by the BOK, reached 2.6 percent in July, marking the largest increase since December 2023 (2.8 percent).
BOK Governor Shin Hyun-song has repeatedly messaged since taking office in April that it is necessary to focus on price stability and raise interest rates without delay.
Conversely, growth showed stronger-than-expected momentum, bolstered by improving terms of trade, robust semiconductor exports, and a recovery in domestic demand.
Real gross domestic product (GDP) growth bounced from -0.1 percent in the fourth quarter of last year to 1.8 percent in the first quarter of this year, and maintained a relatively high level of 0.6 percent in the second quarter.
The cumulative current account surplus from January through June approached 200 billion dollars, breaking the record for the largest half-year total in history.
Reflecting these trends, the BOK today revised its annual growth forecast for this year upward by 0.7 percentage points, from 2.6 percent to 3.3 percent.
This is the largest upward adjustment since May 2021, when the forecast for that year was raised by 1.0 percentage point from 3.0 percent to 4.0 percent.
The growth forecast for next year was also revised upward from 2.1 percent to 2.9 percent.
The bank projected that, powered by semiconductor exports, high growth momentum will overcome the base effect and persist for a considerable period.
High growth can translate into inflation.
This is because rising incomes expand consumer spending capacity, acting as a demand-side price pressure.
In fact, real gross domestic income (GDI) in the second quarter—which indicates the actual purchasing power of incomes—increased by 15.6 percent compared to the second quarter of last year, marking the highest level in 38 years and three months since the first quarter of 1988 (16.4 percent).
The U.S. Federal Reserve is widely analyzed to likely freeze its benchmark interest rate at 3.50 to 3.75 percent during the Federal Open Market Committee (FOMC) meeting scheduled for September 15–16 (local time).
Analyses suggest the U.S. is in a phase of waiting for inflation to gradually stabilize amid a slowing labor market.
With this base rate hike, the policy rate gap between South Korea and the United States (3.50–3.75 percent) narrows from 1.00 to 0.75 percentage points.
This represents the smallest gap in three years and eight months, since the differential widened from 0.75 percentage points in November 2022 to 1.25 percentage points in December of that year.
Attention is now focused on whether a stronger South Korean won will become apparent.
The BOK's recent stance is that a narrowing of the Korea-U.S. rate gap can help restore the fundamental value of the won.
The exchange rate, which surpassed 1,560 won during intraday trading in early June to record its highest level since the global financial crisis, has recently regained stability.
The exchange rate fell below 1,500 won for the first time in about a month on July 8, and dropped under 1,400 won on the 19th of this month.
On the 24th, it dropped to 1,376.5 won during intraday trading, reaching its lowest level since September 17 of last year (1,375.7 won).
Additionally, the increased burden on vulnerable borrowers resulting from rate hikes could become a factor for future consideration regarding financial stability.
Household credit balance, which represents comprehensive household debt, stood at 2,019 trillion 800 billion won at the end of the second quarter, surpassing 2,000 trillion won for the first time on record.
At the same time, the delinquency rate on won-denominated loans by domestic banks (based on principal and interest overdue for one month or more) stood at 0.56 percent, the highest for the same month since 0.71 percent in 2016.
Based on the first quarter, if mortgage rates were to rise by 0.25 percentage points, the annual interest burden on all borrowers was estimated to increase by 1 trillion 800 billion won.
The interest burden on other loans, such as unsecured loans, is also projected to increase by 1 trillion 500 billion won annually.
The market anticipates that after assessing the impact of consecutive rate hikes, the Monetary Policy Board will pursue additional rate increases as early as the fourth quarter of this year or the first quarter of next year.
This reflects the view that the country is still in the middle of a rate-hike cycle.
Governor Shin will personally explain the background of today's base rate decision and the future direction of monetary policy during a press conference at around 11:10 a.m. today.
(Photo: Yonhap News)
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