South Korea’s central bank is expected to raise interest rates this week for the first time in more than three years as persistent inflation, stronger economic growth and a weaker won increase pressure on policymakers.
The Bank of Korea (BOK) is widely expected to lift its benchmark interest rate to 2.75% on July 16, according to a Reuters poll of economists. A majority of economists also expect another increase by the end of the year, which would bring the policy rate to 3%.
The expected tightening comes after consumer inflation accelerated to a two-and-a-half-year high of 3.2% in June, remaining above the BOK’s 2% target for the fourth consecutive month.
Economists expect inflation to remain around 3% in the second half of the year, driven largely by higher global oil prices following the resumption of the Iran conflict. Rising energy costs have added to supply-side pressures while the weaker South Korean won has increased the cost of imported raw materials.
The South Korean economy has also shown stronger momentum, expanding at its fastest pace in nearly six years in the first quarter. Rising house prices and elevated household debt have provided policymakers with more room to tighten monetary policy.
The won has weakened more than 4% against the US dollar so far this year, with analysts expecting further pressure on the currency in the near term.
Benson Wu, Korea economist at BofA Global Research, said the won’s weakness would remain a key focus for policymakers as recent verbal interventions and coordinated government messaging have had limited impact.
“We expect KRW weakness to be a key focus,” Wu said. “While policymakers have intensified verbal intervention and coordinated messaging across ministries in recent weeks, the impact on the won appears to have been limited.”
The BOK’s expected move follows similar tightening actions from central banks in Australia, New Zealand, Indonesia and the Philippines as policymakers respond to inflation risks linked to energy prices and currency weakness.
