The Bank of Korea raised its interest rate by 25 basis points to 3% on Thursday. The move marked a second consecutive increase.

Policymakers had already flagged more tightening in July. Firm core inflation and a renewed jump in Seoul housing prices strengthened the case for another move.

Bank of Korea Hikes Rates to 3%

The hike came as consumer price inflation eased to 2.8% in July. However, core inflation, which strips out volatile food and energy prices, moved the other way. It came in at 2.6% in July, the highest since December 2023. 

Korea’s policy turn is recent. The central bank cut its benchmark rate by a full percentage point between October 2024 and May 2025. It then left the rate at 2.5%.

That pause ended last month. The BOK lifted the rate to 2.75% in July, its first increase in three and a half years.

Thursday’s move returns borrowing costs to where they stood before the BOK’s February 2025 cut. It also settles a close call among forecasters. 18 of 35 economists surveyed by Reuters expected the hike.

The board had already flagged its direction at the July meeting.

“Therefore, it is judged that it will be necessary to continue a policy stance consistent with further rate hikes, and the Board will determine the timing and pace of further increases in the Base Rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy, and financial stability,” the statement read.

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Housing and Inflation Keep the Pressure On

In July, Korea’s central bank built the case for a rate hike on three pressures: growth, inflation, and financial stability. The BOK said consumer prices would run above the 2% target for “a considerable time.”

The financial stability argument rests on housing. Seoul apartment transaction prices rose 2.50% in June from May, the steepest monthly gain since June 2021. The growth argument rests on chips. 

“Korea is benefiting as a key player in the global AI value chain during the process of global AI diffusion. Accordingly, exports and investment are expected to grow strongly, and unprecedented expansion in nominal GDP resulting from the surge in semiconductor prices is likely to support domestic demand through higher corporate profits, increased investment, and gains in wages and tax revenues,” it added.

What Tighter Policy Means for Korean Risk Appetite

Higher rates reach markets already under strain. The KOSPI lost 22% in July, its worst month since 2008, before the won rallied below 1,400 per dollar in August. Leveraged chip funds shed close to $1 billion this month, their first outflow since launch in late May. 

Retail capital in South Korea rotates quickly between equities, structured products, and digital assets. Whether a 3% policy rate slows that rotation should become clearer once September flows settle.

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Source: BeInCrypto