The Bank of Korea on the 27th raised the base rate to 3% from an annual 2.75%. Following a 0.25 percentage point hike in July, it lifted rates again in August. It was the first back-to-back increase by the Bank of Korea since the COVID-19 pandemic (2021–2023). The rate reaching the 3% range was the first time in 1 year and 9 months since November 2024. The rate gap with the United States also narrowed to 0.75 percentage point from 1 percentage point.
The Bank of Korea said that on the day, 6 of the 7 members of the Bank of Korea's monetary policy committee, including Governor Shin Hyun-song, supported a 0.25 percentage point rate hike. Only Commissioner Hwang Geon-il presented a minority view that it would be desirable to keep the rate at 2.75%. On the rate decision, the Bank of Korea said, "It is important to prevent a broadening of price increases through a preemptive response," and noted, "We judged that raising the base rate is appropriate."
The consumer price inflation rate has increased its monthly gain from 2.2% in March, when the Middle East war broke out, to April (2.6%), May (3.1%), and June (3.2%). It slowed to 2.8% in July, but it is still above the Bank of Korea's target (2%). The core inflation rate (excluding food and energy), which Governor Shin Hyun-song said he would watch closely when deciding rates, was also 2.6%, the biggest gain since December 2023 (2.8%).
The Bank of Korea projected that prices will continue to show an upward trend. If major conglomerates post huge operating profits thanks to strong semiconductor exports and wages and bonuses rise, consumption could expand and push prices higher. The Bank of Korea said, "Demand-side pressures due to improved income conditions are gradually increasing, and prices are expected to remain above the target for a considerable period." The Bank of Korea forecast this year's consumer price inflation at 2.7%, the same as in May. However, core inflation is projected at 2.5%, higher than the previous forecast (2.4%).
Given that the country is maintaining a high economic growth rate, the consecutive rate hikes appear to have posed little burden. The Bank of Korea projected this year's economic growth at 3.3%, raising it from the May forecast (2.6%). Next year's growth forecast also increased to 2.9% from the earlier estimate (2.1%).
The Bank of Korea cited rising household liability and increases in dwelling prices in the greater Seoul area as another reason for the rate hike. Korea's household liability stood at 2,019.8 trillion won as of end-June, surpassing 2,000 trillion won. It rose by 25.9 trillion won from the previous month, the largest increase in 4 years and 9 months since the third quarter of 2021.
The currency tightening stance is expected to continue through the first quarter of next year. In the dot plot showing the expected policy rate level in six months by the seven Monetary Policy Board members, the largest number of dots (10 out of 21) were at 3.25%. Six were at 3.5%, and five were at 3%. Four dots were at the current rate of 3%. The Bank of Korea said, "Going forward, monetary policy will determine the timing and pace of additional hikes while closely examining price and economic trends and financial stability conditions."