Bank of Korea Expected to Raise Key Interest Rate This Week

By Kim Boram

SEOUL, July 13 (Yonhap) -- The Bank of Korea (BOK) is widely expected to raise its benchmark interest rate later this week, with investors now focusing on how far and how quickly the central bank will tighten monetary policy in the coming months.

At its Monetary Policy Board meeting on Thursday, the BOK is expected to raise the policy rate by 25 basis points to 2.75 percent from 2.5 percent, according to economists and market participants.

The move would mark the first rate hike since January 2023 and end an eight-meeting pause that began in July last year.

The BOK has signaled a shift toward tighter monetary policy since May, citing persistently high inflation, a weakening local currency and solid economic growth supported by robust semiconductor exports.

"It is necessary to raise the base rate at an appropriate time," BOK Gov. Shin Hyun-song said at a press conference following the bank's previous rate-setting meeting on May 28.

"We will determine the timing and pace of interest rate hikes based on incoming data, while assessing the extent of inflationary pressures, the trend of economic recovery and financial stability," he said.

Since then, Shin has repeatedly signaled a hawkish stance in public remarks.

During a parliamentary session last week, Shin stressed the need for a rate hike "at an appropriate time," to fight against inflation running above target and other financial risks.

Consumer prices increased 3.2 percent in June from a year earlier, marking the sharpest increase since December 2023, partly reflecting higher oil prices and supply chain disruptions stemming from the Middle East war.

The Korean won also remained under pressure, staying over the 1,500-won-per-dollar level throughout June and briefly weakening to near the 1,550-won threshold on June 30 for the first time since March 2009 amid broad dollar strength and foreign selling of local equities.

Meanwhile, exports remained robust. South Korea's outbound shipments reached a record US$102.25 billion in June, up 70.9 percent from a year earlier and surpassing the $100 billion mark for the first time. Exports of semiconductors nearly tripled to reach a record $44.82 billion.

Against this backdrop, local brokerages and global investment banks widely expect the BOK to raise rates by 25 basis points this week, with some forecasting a unanimous decision by the Monetary Policy Board.

"We expect the Bank of Korea to raise its base rate by 25 basis points to 2.75 percent," Moody's said in its weekly preview. "The July hike will be the start of a gradual tightening cycle."

Moody's said above-target high inflation, a weak won, resurgent household debt and rising Seoul house prices have strengthened the case for tighter monetary policy.

"And with growth booming on the back of semiconductor exports, the Monetary Policy Board has strong grounds to raise rates," it said.

Some economists also expect the BOK to deliver another rate hike in August.

"It is highly likely that BOK Gov. Shin will signal gradual 25-basis-point rate hikes every quarter," said Kim Jin-wook, an economist at Citi. "A back-to-back increase may be the optimal policy option to bring forward the tightening cycle."

Others, however, argue inflationary pressure is beginning to ease as global oil prices have largely returned to pre-war levels and the Korean won has shown signs of stabilizing.

"Consumer prices hit their highest level in 2 1/2 years in June, but a closer look at the data suggests headline inflation may have already peaked," said Kim Ji-man, a researcher at Samsung Securities.

"The key lies in the BOK's assessment of core inflation and demand-side pressures," he said. "Whether concerns over a second consecutive rate hike in August persist will depend on how much emphasis the central bank places on demand-side pressures in its monetary policy statement."