The Bank of Korea (BOK) increased its base rate by 25 basis points (bp) to 3.00% at its August Monetary Policy Board meeting, following a 25 bp hike in July. This decision marks the first back-to-back rate increase in three and a half years. The central bank's move was largely influenced by the need to preemptively address inflation and robust economic growth, particularly strong semiconductor exports driven by global AI demand, despite some softer economic data. This aligns with the views of a majority of experts, as a Seoul Economic Daily survey found 65% of 20 experts anticipated a 0.25 percentage point increase.
Several factors supported the BOK's decision. Second-quarter GDP growth rose 3.7% year-on-year, with gross domestic income (GDI) surging 15.6%, reaching its highest level in approximately 38 years. While July's consumer price inflation came in slightly lower than market expectations at 2.8% year-on-year, and living prices slowed to 2.5%, core inflation accelerated slightly to 2.6%. The BOK's hawkish stance, including former Deputy Governor Yoo's emphasis on preemptive monetary policy, suggested a dominant psychology towards consecutive rate hikes to observe their effects.
However, a significant portion of experts and market participants also called for caution or a freeze. A survey by Yonhap Infomax last week showed 11 out of 21 domestic and foreign financial institutions expected a freeze at 2.75%, while 10 predicted a 25 bp increase. Similarly, the Korea Financial Investment Association's survey indicated 79% of bond professionals expected a freeze. Arguments against a consecutive hike included the absence of intensified inflation concerns, recent international oil price trends, a decline in the won-dollar exchange rate, and stock market corrections. Expected inflation for the next one, three, and five years remained unchanged at 2.7%, 2.6%, and 2.6% respectively.
Standard Chartered (SC) had specifically forecasted a rate freeze, although they raised their terminal rate outlook for the BOK from 3.25% to 3.50%. SC economist Park Jong-hoon argued that the economy, while supported by a semiconductor boom, was not yet overheated enough for immediate consecutive hikes, suggesting a more gradual tightening path. He also noted that rising U.S. long-term interest rates were already tightening Korea's financial conditions, reducing the need for accelerated BOK hikes. Concerns about K-shaped economic polarization and the burden on vulnerable groups from rapidly increasing interest rates were also raised by experts like Lee Hyo-seob from the Korea Capital Market Institute.
