The Bank of Korea raised its Base Rate by 25 basis points to 2.75% on Thursday, delivering the first increase in more than three years and ending a prolonged run of steady or looser policy settings. The move by the Monetary Policy Board was in line with the median estimate of economists polled by Reuters ahead of the meeting.
The quarter-point rise takes the benchmark rate from 2.50%, where it had been sitting, back to the level last seen in May 2025. The move had been widely expected after hawkish communications at the Board's May meeting and a June speech by Governor Shin Hyun-song highlighting the need for policy tightening.
FIRST HIKE IN OVER THREE YEARS
Thursday's decision marks the Bank of Korea's first tightening step since the final increase of its previous hiking cycle in January 2023, three and a half years ago. In the intervening period the Board cut the Base Rate from 3.50% to 2.50% between October 2024 and May 2025 and then held it for more than a year.
The central bank pointed to consumer price inflation of 3.2% in June, above its 2% target, as well as rising home prices in the Seoul metropolitan area and growing household loans.
Korean government bond yields fell by around 15-30 basis points across the curve after the decision, as the guidance was less hawkish than market pricing, according to MUFG Research.
MARKETS AND ECONOMISTS ALIGNED
The 25 basis-point move had been forecast by economists in a Reuters poll ahead of the meeting.
Analysts at KB Securities expected the next hike in October rather than a back-to-back move in August, the Korea Herald reported. The Board voted unanimously for the increase, and Shin said: "We will continue our policy response until we are confident that inflation is converging sustainably toward the target." Shin said the pace and extent of further tightening would be determined based on incoming data, including second-quarter GDP figures.
At his press conference on Thursday, Shin said inflation was expected to remain above the target level for a considerable period; inflation reached 3.2% in June, the fastest pace since December 2023, as surging global oil prices fed into domestic prices.