BoK poised for 25bps hike to curb inflation and defend won
The Bank of Korea is expected to raise interest rates this week to combat accelerating inflation and stem the prolonged weakness of the won against the dollar.
South Korea’s central bank is widely anticipated to increase its benchmark rate by 25 basis points to 2.75% when its Monetary Policy Board convenes on July 16. All 10 macroeconomics and bond market specialists surveyed expect the board to approve the hike unanimously, ending a year-long pause at 2.5%.
The impending adjustment signals a definitive shift in monetary policy aimed at addressing mounting price pressures and defending the currency. For market participants, a higher rate environment will increase corporate borrowing costs but is viewed as a necessary buffer against imported inflation driven by exchange rate volatility.
Consumer prices rose 3.2% in June from a year earlier, sharply overshooting the Bank of Korea’s 2% target and marking the largest increase since December 2023. The cost of living index climbed 3.4% in June, reflecting an inflation trajectory that accelerated steadily after holding at 2% in January and February.
The depreciating won has compounded these inflationary dynamics. The currency has traded above KRW1,500 against the US dollar for more than a month, closing at KRW1,501.4 on July 10. It previously endured a 36-session streak above that threshold between mid-May and early July.
Governor Shin Hyun-song has identified the interest rate differential with the United States as a primary catalyst for the won's weakness. South Korea's policy rate currently sits 125 basis points below the Federal Reserve's, an inversion that has persisted since July 2022.
Since taking office following the May policy meeting, Shin has publicly advocated for tighter monetary conditions on three separate occasions. He stated rates should be raised at an "appropriate time" in May, reiterated the stance during a recent anniversary speech, and restated it during July 9 testimony before the National Assembly's Finance and Economy Committee.
Looking ahead, analysts project this week's move will be followed by another 25 basis point increase in October. That would push the base rate to 3% by the end of the year, returning it to its highest level since January of last year.
