Korea: Bank of Korea stands pat in May, as expected
Central Bank leaves rates unchanged for a year: At its meeting on 28 May, the Bank of Korea (BOK) decided to keep the base rate unchanged at 2.50%. The decision met market expectations, marking a full year without policy changes. The rate remains at its lowest level since mid-2022.
Rising inflation and solid growth drive decision: The Central Bank’s decision reflected a cautious stance in the face of elevated geopolitical risks, a softer won and rising inflationary pressure. Annual inflation hit its highest level in nearly two years in April, driven by higher oil prices, prompting the Bank to raise its inflation forecast for this year, while projecting a gradual easing next year. At the same time, the BOK lifted its GDP growth outlook, citing a stronger export outlook fueled by a robust semiconductor sector and booming AI-related investment.
BOK to start hiking in Q3: According to the Bank’s governor, the trajectory of GDP growth, inflation, the currency and the housing market points toward monetary tightening. Over recent months, our Consensus Forecast for end-2026 interest rates has shifted higher, as mounting inflation risks linked to the Iran conflict have altered the policy outlook. Most panelists now expect the Bank to raise rates by 25–50 basis points by the end of 2026, with an initial 25-basis-point increase likely in the third quarter.
The BOK will reconvene on 16 July.
Panelist insight: Commenting on the outlook, Ho Woei Chen, analyst at United Overseas Bank, stated:
“The acceleration in inflation and resilient economic growth would likely nudge the BOK to start hiking interest rates as soon as its next meeting in Jul. Based on BOK’s forecast for inflation to moderate to 2.3% in 2027, we think the central bank would not need to go beyond two hikes, but the outlook continues to hinge on a potential peace deal in the Middle East. We now expect 25-bps hike in the base rate to 2.75% in Jul, followed by another 25-bps in either Oct or Nov.”