The Bank of Korea unanimously raised its benchmark seven-day repurchase rate by 25 basis points to 2.75% on Thursday, marking its first interest rate hike in three and a half years.
The monetary policy board, led by Governor Shin Hyun-song, pivoted back to tightening to combat persistent inflationary pressures exacerbated by rising energy costs and ongoing geopolitical volatility in the Middle East.
The central bank flagged that further rate hikes remain on the table as consumer price inflation, which hit 3.2% in June, is projected to stay above its 2% target.
The decision aligns with market expectations as strong AI-driven semiconductor exports continue to support the domestic economy.
However, the tightening cycle comes amid warnings of a significant negative interest rate buffer. In a July 10 note, ING economist Padhraic Garvey noted that South Korea's negative interest rate buffer of -1.2% and weak won exchange rates put immense pressure on the central bank to tighten policy.
Following the announcement, Capital Economics senior economist Gareth Leather noted that strong export performance and housing market risks give the Bank of Korea the capacity to raise interest rates further in the coming months.
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