BOK signals further rate hikes after first increase in three and half years

The Bank of Korea (BOK) signaled more rate hikes ahead after raising its benchmark interest rate by 25 basis points to 2.75 percent on Thursday, its first increase in three and a half years, as policymakers seek to curb rising inflation and combat a weak won.

“We will continue to respond with monetary policy until we are confident that inflation is converging sustainably toward our target,” BOK Gov. Shin Hyun-song said at a press conference in central Seoul after the Monetary Policy Board unanimously voted to raise the benchmark interest rate. “We expect inflation to remain above our target for a considerable period,” he added.

Shin said the significant gap between Korea's GDP and gross domestic income (GDI) could fuel demand-side inflationary pressures.

"Improving terms of trade have led the GDI to grow much faster than the GDP, as export prices have risen faster than import prices," he said.

“If income gains continue to materialize, we need to remain vigilant about inflationary pressures from the demand side,” Shin added. “We saw inflation surge after the pandemic in 2021 after underestimating demand-side price pressures.”

After cutting its benchmark interest rate by a cumulative 100 basis points across four meetings starting in October 2024, the BOK kept the policy rate unchanged at 2.5 percent from July 2025.

But inflation growth has become steep, driven by higher oil prices amid the prolonged conflict in the Middle East and a weaker won that has pushed up import costs. Korea's consumer prices rose 3.2 percent in June from a year earlier after increasing 3.1 percent in May, staying above 3 percent for a second straight month. The BOK expects the inflationary effects of higher oil prices to last for at least a year.

“All of our upcoming policy meetings are ‘live meetings,’ meaning every meeting is open to a policy decision, as there are too many important data releases ahead to lean decisively in either direction,” Shin added.

The BOK is expected to raise its 2026 growth forecast from the 2.6 percent projected in May when it releases its next economic outlook in August, supported by robust semiconductor exports.

"All components of GDP growth remain remarkably strong," the governor said. "Not only exports, but also investment and private consumption have been holding up well, putting the economy on track to outperform our May forecast."

Shin said the launch of 24-hour won trading in early July has had limited impact on reducing the influence of the won’s nondeliverable forward (NDF) market — a derivatives market for currencies that are not freely traded internationally — which he has previously cited as a key driver of the won’s weakness.

“It will take time, but ultimately it could discourage investors from taking positions on the won without underlying spot transactions,” Shin added, adding that an offshore won settlement system will launch for a pilot run this fall, which would enable foreign investors to settle won transactions freely among themselves outside Korea.

The won recently moved back below the psychologically important 1,500-per-dollar level after trading above it for nearly two months.

“As we continue our rate-hike cycle and the interest rate gap with the United States narrows, we will also monitor the extent to which that affects the NDF market,” Shin added.

BY JIN MIN-JI [[email protected]]