South Korea's central bank governor, Shin Hyun-sung, stated that the bank deems it necessary to raise the benchmark interest rate at an appropriate time, considering persistent inflation above target, improving economic growth, and rising financial stability risks. This remark strengthens market expectations that the central bank will initiate a rate hike at its policy meeting scheduled for next week.
During a policy report to the National Assembly's Planning and Finance Committee on Thursday, Shin noted that the benchmark rate has been held at 2.5% since last July. "Regarding future monetary policy operations, considering that inflation continues to exceed the target, economic conditions are improving, and financial stability risks are rising, we judge it necessary to raise the benchmark interest rate at an appropriate time," he said. This statement continues the Bank of Korea's gradual shift toward a more hawkish policy stance since May, when it raised its 2026 economic growth forecast and signaled that multiple factors—including inflation, growth, exchange rates, and financial imbalances—are increasingly aligning toward the same policy direction. The Bank of Korea's next monetary policy meeting is scheduled for July 16.
On the economic fundamentals, Shin emphasized that South Korea's economic growth has expanded, driven by strong semiconductor exports, particularly fueled by the global proliferation of artificial intelligence (AI) boosting semiconductor demand. He noted that improved terms of trade due to rising semiconductor prices have significantly increased nominal GDP growth. He expects the South Korean economy to maintain robust growth as the semiconductor boom continues and tensions in the Middle East ease. The International Monetary Fund recently raised its growth forecast for South Korea, with the upward revision being the largest among 30 major global economies, primarily supported by strong semiconductor demand.
Regarding inflation, Shin pointed out that consumer price increases expanded significantly in the first half of the year due to rising international oil prices. Although easing tensions in the Middle East provide some moderating effect, accumulated cost increases from earlier periods are still gradually being passed through, while pressure from domestic demand is also rising. He expects inflation to remain elevated for a considerable period.
In the area of financial stability, Shin warned that risks are accumulating. Housing prices in Seoul and surrounding areas are accelerating again, coupled with increased leverage-driven investment, leading to a continued buildup of financial imbalance risks. In the foreign exchange market, despite a large current account surplus, the South Korean won is trading at a high level within the low-to-mid 1500 range against the US dollar, due to sustained net selling of Korean stocks by foreign investors and a stronger US dollar.
In the stock market, share prices had previously risen sharply, driven by strong performance in core industries and improvements in capital market regulations, but have recently experienced some correction due to profit-taking by foreign investors and asset rebalancing.
Shin stated that, thanks to the expansion of the real economy and the inherent resilience of financial institutions, South Korea's internal financial system remains generally stable amid a highly uncertain external environment. However, he also warned that the accumulation of financial imbalances due to re-accelerating housing prices in the capital region, along with high volatility in financial and foreign exchange markets, remain potential "destabilizing factors."
The Bank of Korea indicated that, in an environment of high domestic and international uncertainty, it is acting in coordination with the government to actively work on stabilizing financial and foreign exchange markets and is advancing several institutional improvements to effectively respond to changes in the financial and economic environment. Simultaneously, policymakers will continue to monitor risk factors such as geopolitical tensions, the direction of global monetary policy, and uncertainties related to AI investments, to maintain market stability.
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