[Anchor]

The Bank of Korea has shifted its policy stance to tightening for the first time in 3 years and 6 months, raising the base interest rate to 2.75% per annum. With mounting inflationary pressure and a clear economic recovery, coupled with rising household debt and housing prices, analysts suggest the central bank has entered a full-scale interest rate hike cycle.

Reporter Lee Seong-hoon has the story.

[Reporter]

The Bank of Korea's Monetary Policy Board has raised the base interest rate by 0.25 percentage points, from 2.5% to 2.75%.

This marks the first interest rate hike in 3 years and 6 months since January 2023.

The primary driver behind this rate increase is inflation.

Following the Middle East conflict, high oil prices have persisted, leading to consumer price inflation remaining in the 3% range for two consecutive months in May and June. The Bank of Korea expects inflation to remain at a high level throughout the second half of the year.

On the other hand, the economy is recovering faster than expected.

Driven by strong semiconductor exports, the economic growth rate reached 1.8% in the first quarter of this year, and the government has raised its growth forecast for this year to 3%.

The rise in household debt and housing prices in the Seoul metropolitan area also supported the decision to raise rates.

Household loans have increased for six consecutive months, and housing prices in Seoul have seen their largest increase this year.

The Bank of Korea explained that the rate hike was decided by considering both inflation and financial stability.

With this rate hike, the gap between the base interest rates of South Korea and the United States has narrowed from 1.25 percentage points to 1 percentage point.

The Bank of Korea anticipates that narrowing the interest rate gap will also help stabilize the value of the Korean won.

As a result of the base rate hike, the interest burden on households with variable-rate loans is expected to gradually increase.

This decision to raise the base interest rate was made with the unanimous consent of all seven members of the Monetary Policy Board.

With the Bank of Korea signaling a tightening stance, the market is placing weight on further rate hikes within the year.

(Video Editing: Kim Jun-hee)