The Bank of Korea (BOK) is poised for further interest rate hikes, with the probability of a consecutive increase at the August 27 Monetary Policy Board meeting growing significantly. This expectation is driven by a stronger-than-anticipated core inflation reading and positive second-quarter GDP growth. At a July 29 briefing, BOK Governor Shin Hyun-song indicated that the central bank prioritizes core inflation in its policy decisions.
Core inflation, which excludes volatile food and energy prices, increased to 2.6% year-on-year in July, up from 2.5% in June, marking its highest level since December 2023 when it hit 2.8%. This upward trend in core inflation suggests persistent underlying price pressures. Despite a cooling in headline consumer price index (CPI) to 2.8% in July, down from 3.2% in June and below market expectations due to lower oil prices, the BOK anticipates that the CPI may rise again in August due to base effects from mobile carrier discounts last year.
The BOK's Monetary Policy Board already raised the Base Rate by 25 basis points to 2.75% on July 16, citing strong economic growth driven by exports and investment, along with inflation expected to remain above target. The central bank emphasized the need for a continued policy stance consistent with further rate hikes to stabilize consumer price inflation, manage financial stability risks like exchange rate volatility, and address rising housing prices and household debt. The BOK expects core inflation to be somewhat higher than its previous forecast of 2.4% for the year.
