Key facts
- The Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75%.
- This is the first rate hike by the BOK in three and a half years.
- The decision was widely expected by economists.
- South Korea's economy has rebounded faster than expected, driven by semiconductor exports.
- Headline inflation in South Korea is at a 2-1/2-year high.
South Korea's central bank raised its benchmark interest rate by 25 basis points to 2.75% on Thursday, a move widely expected by markets to combat persistent inflationary pressures and stabilize the slumping won. This marks the first interest rate hike by the Bank of Korea (BOK) in three and a half years.
The BOK's monetary policy board voted to raise the seven-day repurchase rate, a decision accurately predicted by most economists surveyed in a Reuters poll. Asia's fourth-largest economy has been rebounding faster than expected this year, driven by a boom in semiconductor exports and investment, even as the local currency has weakened 3.4% against the greenback.
Gross domestic product expanded 1.8% in the first quarter, prompting the government to raise its growth forecast to a five-year high of 3.0% for this year. The rate hike aligns the BOK closely with other regional central banks that have already tightened policy. With headline inflation at a 2-1/2-year high, analysts anticipate at least one more rate hike before the end of the year.
Stephen Lee at Meritz Securities noted that the move was well-telegraphed by the BOK's previous forward guidance, which indicated a bias towards higher rates. Median forecasts suggest the BOK will raise its key rate to 3.25% by the first quarter of 2027.