South Korea's central bank raises interest rates to 3% amid inflation concerns

South Korea's central bank on Thursday raised rates for a second straight time in its bid to cool rising prices, after core inflation reading hit the highest level last month since December 2023.

The Bank of Korea hiked rates by 25 basis points to 3%, its highest since January 2025 and in line with expectations.

The BOK said in its statement that while South Korea's economy continued to grow at a stronger-than-expected pace, inflation is likely to remain above the target level for a "considerable time."

Core inflation in Asia's fourth largest economy climbed to 2.6% in July, while the headline inflation rate in July cooled slightly to 2.8%, after rising for four straight months since the Iran war started in February.

"The future path of inflation is judged to be subject to high uncertainties related to movements in global oil prices and the exchange rate, to the pace of the recovery in domestic demand, and to the extent of the broadening of the increase in wages," the central bank said.

The country's economy grew 3.7% in the second quarter, above expectations and mainly powered by exports.

In its last meeting, the BOK said that it was necessary to "continue a policy stance consistent with further rate hikes," as elevated cost pressures persist and housing prices continue to accelerate in Seoul and its surrounding areas.

Housing prices in Seoul had jumped 2.5% month on month in June, marking its highest rise in five years, according to South Korean news outlet Asia Business Daily.

The BOK also noted that export and domestic demand are both expected to show strong growth, supported by the spillover effects of the country's semiconductor sector.

As such, inflation is forecast to remain above its 2% target level for a considerable time, the central bank said.

In light of the strong growth and inflation figures, the BOK would likely need to continue to raise rates, albeit with some caution, said Frederic Neumann, chief Asia economist at HSBC.

"However, monetary officials will be mindful not to slam the brakes: Korea's expansion is highly imbalanced, with the AI hardware boom and equity market gains not fully translating into broad-based consumption," he added.