Bank of Korea raises rates to 2.75% for first time since 2023

South Korea's central bank raised its benchmark rate for the first time in three-and-a-half years, joining a growing list of Asian economies tightening policy as the U.S.-Iran conflict fuels imported inflation.

The Bank of Korea raised its base rate by 25 basis points to 2.75% on Thursday, its first increase since early 2023, as persistent inflation driven by the U.S.-Iran conflict and a weakening won forced policymakers to act.

"The governor made it clear that the bank's mandates were, on a rare occasion, not conflicting but pointing in the same direction for a hike," said Bum Ki Son, an economist at Barclays, referring to BOK Governor Shin Hyun-song's earlier signals.

The decision, expected by 36 of 37 economists in a Reuters poll, follows June consumer inflation of 3.2%, the highest in two-and-a-half years and above the BOK's 2% target for a fourth straight month. The South Korean won has fallen more than 4% against the dollar this year, amplifying imported price pressures from higher global oil prices after the resumption of hostilities in the Middle East.

The hike marks a turning point for Asia's fourth-largest economy, where first-quarter GDP grew at its fastest pace in nearly six years, giving policymakers room to address inflation without derailing growth. Markets now price a second increase to 3% by year-end, with the median economist forecast calling for 3.25% by the first quarter of 2027.

The BOK joins central banks in Australia, New Zealand, Indonesia and the Philippines that have already tightened policy this year, highlighting a regional shift toward higher borrowing costs as the inflationary spillover from the U.S.-Iran conflict broadens. The last time the BOK raised rates was in January 2023, when it delivered a 25-basis-point increase to 2.5% before pausing for more than three years.

Governor Shin had telegraphed the move at the bank's May meeting, when the BOK raised both its growth and inflation forecasts and released a dot plot showing a majority of board members projecting the policy rate would reach 3% over the following six months. The hawkish forward guidance reflected expectations that inflation would average around 3% through the second half of 2026, driven largely by elevated oil prices and the won's depreciation.

Inflation and the Won

The won's weakness has become a particular focus for policymakers. The currency has lost more than 4% against the dollar this year, increasing the cost of imported raw materials and adding to supply-side price pressures. While the government has intensified verbal intervention and coordinated messaging across ministries, the impact on the won has been limited, according to Benson Wu, Korea economist at Bank of America Global Research.

"We will be watching closely for any signals that could open the door to back-to-back rate hikes," Wu said, though he noted that consecutive increases were not the bank's base case.

Forward Path

Economists expect the BOK to deliver one more quarter-point increase by the end of the fourth quarter, taking the policy rate to 3%, before pausing to assess the cumulative impact of tighter policy on the economy. The median forecast sees the rate reaching 3.25% in the first quarter of 2027 and holding there through at least the end of next year.

Inflation is projected to average 2.7% this year and 2.2% in 2027, while gross domestic product is expected to grow 2.8% in 2026 and 2.1% in 2027. The BOK's next meeting is scheduled for August, though most economists expect the next move to come in September or October, giving the bank time to assess how the conflict-driven oil shock and the won's trajectory evolve.

This article is for informational purposes only and does not constitute investment advice.