The details: The Bank of Korea on Thursday increased its benchmark interest rate by 25 basis points to 3.00% - its highest since early 2025 and marking the second consecutive rate hike after increasing it in July in its first hike in over three and a half years. The Monetary Policy Board decided 6-1, with one member favoring a no-change to 2.75%. The move comes after core inflation (which excludes food and energy) rose to 2.6% in July - its highest since December 2023 - despite a drop in headline inflation to 2.8%. In addition to hiking rates, the BOK significantly increased its 2026 growth forecast to 3.3% from 2.6%, noting the positive growth driven by strong exports of semiconductors and improving domestic income conditions while also raising concerns about increasing Seoul housing prices and uncertainties in the Middle East. It's the first time in more than a year the BOK hiked rates twice.
Why it matters: This moves against the trend seen globally lately where major central banks have had reasons to consider whether or not to continue with steady interest rates or make eventual cuts due to dropping inflation figures. Korea's move is being informed by a very different story - an unexpectedly strong economy largely propelled by the semiconductor exports boom due to advances in AI. This aspect of the move is especially important because the impact of the AI infrastructure cycle is no longer only reflected in the companies' earnings reports and stock prices but also in a major central bank's decision. At the same time, analysts note that although there is economic recovery in place, it is not evenly distributed and domestic consumption lags far behind exports, which is why expectations are for the BOK to pause after only one more increase in rates.
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