South Korea’s central bank raised interest rates for the first time in three-and-a-half years on Thursday, signalling further tightening ahead as a semiconductor-driven economic recovery raised inflation concerns.
The Bank of Korea’s monetary policy board voted to lift its seven-day repurchase rate by 25 basis points to 2.75% to support the won and address continued inflationary pressure.
The central bank said South Korea’s economic growth is expected to “considerably exceed” its previous forecast of 2.6% made in May, while inflation is likely to remain elevated for “a considerable time.”
“With developments across all three areas, growth, inflation, and financial stability, supporting the need for an interest rate hike, it was judged appropriate to raise rates at this meeting,” Governor Shin Hyun Song said at a news conference in Seoul.
“Unlike major countries with weak economic recoveries, demand-side inflationary pressures are expected to gradually increase as the impact of the semiconductor boom spills over into domestic demand,” he added.
South Korea’s economy has recovered faster than expected this year, supported by strong semiconductor exports and investment linked to the global artificial intelligence boom. Gross domestic product expanded 1.8% in the first quarter, the fastest pace in nearly six years, prompting the government to raise its 2026 growth forecast to 3.0%.
Analysts expect the Bank of Korea to continue raising rates, with many forecasting at least one more hike this year to bring the policy rate to 3.00%.
“(Shin) was remarkably clear. Usually when officials say they are data-dependent, they speak in general terms, but he gave two specific indicators to watch, second quarter GDP and July inflation data,” said Ahn Jae-kyun, an analyst at Korea Investment Securities.
The won remained relatively stable following the widely expected decision, although the benchmark KOSPI fell 6.2% amid renewed selling pressure on chip stocks.
