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The Monetary Policy Board of the Bank of Korea decided to increase the base rate by 25 basis points from 2.75 percent, the central bank said in a statement released on August 27. Six members supported the move while one member, Hwang Kunil, voted to hold the rate unchanged at 2.75 percent. The decision follows a similar quarter-point hike in July that ended more than three years without an increase and represents the first pair of consecutive rises since early 2023, according to the Bank of Korea. The rate now stands at its highest level since January 2025.
Domestic economic growth has continued at a stronger pace than anticipated, supported by robust exports and a recovery in domestic demand, a Bank of Korea assessment found. The central bank revised its growth forecast for this year upward to 3.3 percent from the 2.6 percent projection issued in May, with next year’s outlook placed at 2.9 percent. Uncertainties around the extent of semiconductor sector expansion, developments in the Middle East and changes in the trade environment could affect the path ahead, the statement noted.
Inflation is expected to remain above the 2 percent target for a considerable time, leading the board to judge that preemptive tightening was appropriate to prevent price pressures from broadening, according to the Bank of Korea. The consumer price index rose 2.8 percent in July from a year earlier, remaining above target for an 11th straight month, while core inflation climbed 2.6 percent at its fastest pace since December 2023, figures referenced in the central bank’s review show. Persistent risks from higher oil prices and renewed uncertainty in the Middle East have contributed to these conditions, the Bank of Korea added.
Financial stability concerns, such as rapid apartment price increases in Seoul and record household debt levels, also informed the policy shift, the central bank indicated. Debt owed to deposit-taking banks by households reached 1,194.8 trillion won at the end of July, an increase of 5.4 trillion won from the prior month, Bank of Korea data places the total at that figure. The latest move narrows the gap between South Korea’s policy rate and that of the United States to 0.75 percentage point from 1 percentage point.
The South Korean won strengthened to around 1,379 per U.S. dollar in immediate reaction to the announcement, while the Kospi index advanced 1.58 percent though it eased from opening highs, market reports indicated. Bank of Korea Governor Shin Hyun-song, who assumed the post in April, is scheduled to hold a press conference to discuss the decision later on Thursday. The central bank had held the rate at 2.5 percent from May 2025 until the July adjustment, according to its records.
