Bank of Korea raises rates to 2.75% as inflation pressure returns

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Highlights

The BOK raised rates to 2.75%.
It was the first hike since January 2023.
Inflation reached 3.2% in June.
The won recently traded near 1,482 per dollar.

The central bank increased its benchmark policy rate by 25 basis points to 2.75%, in line with the median forecast of economists, CNBC reported. It was the BOK’s first hike since January 2023.

Inflation forces a policy shift

The Bank of Korea said inflation is expected to remain above its 2% target “for a considerable time,” with higher energy prices still feeding into the economy with a lag. Headline inflation rose to 3.2% in June, its highest level since 2023.

The central bank also flagged uncertainty around the exchange rate, the pace of domestic demand recovery, and wage growth. It now expects headline inflation to average 2.7% in 2026, while core inflation is projected to be somewhat higher than the previous forecast of 2.4%.

Wages are another concern. The BOK said last month that large performance bonuses at major IT companies could broaden into wider wage increases, adding to inflation pressure.

Won weakness and growth give room to tighten

The rate hike also comes after a prolonged decline in the won. The currency touched a 17-year low of 1,561.5 per dollar on June 5 and later neared that level again at 1,559. It has since strengthened and was recently around 1,482 per dollar.

Higher interest rates can support a currency by making local assets more attractive to foreign investors. The BOK also has a stronger growth backdrop than many peers: South Korea’s economy expanded 3.8% in the first quarter, its fastest pace since late 2021.

Still, markets remain under pressure. The KOSPI fell nearly 6% as Samsung Electronics and SK Hynix dropped, tracking losses in U.S. chip stocks.

A harder balance for Seoul

The BOK is trying to contain inflation without damaging a recovery supported by exports and technology demand. Capital Economics said further tightening is likely, citing inflation above target and resilient growth.

That leaves policymakers with a difficult trade-off. Stronger exports and first-quarter growth give the central bank room to act, but falling real retail sales and sharp equity-market swings show that higher rates could still test households and investors.

Earlier, we reported that South Korea brings crypto transfers under FX controls.

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