Korea Interest Rate

Bank of Korea raises rates for the second consecutive meeting

Base rate reaches an over one-year high: At its meeting on 27 August, the Bank of Korea (BOK) decided to raise the base rate by 25 basis points to 3.00%, following a 25 basis point increase in July and reaching an over one-year high. The hike was widely expected by economists and marked the first back-to-back rate increase in more than three years. Six of the seven Monetary Policy Board members supported the decision, while one member voted to keep the rate at 2.75%.

Persistent inflation and stronger economic growth drive the move: The BOK's hike was primarily driven by inflation, which has remained above the 2.0% target over the past five months due to the Iran energy shock. Moreover, the Bank expects inflation to exceed the inflation target for a considerable time. Additionally, robust economic growth—led by strong exports and investment in the semiconductor sector—further underpinned the policy tightening, with increasing wages and consumer spending possibly heating up the economy further. Finally, the BOK noted the need to address financial stability risks, including accelerating housing prices in Seoul and faster household-debt growth; Korean households are some of the most indebted globally relative to income.

Further hikes remain likely: Looking ahead, the Bank of Korea signaled that further rate increases remain possible, although their timing and pace will depend on incoming data on inflation, economic growth and financial stability. The majority of our panelists expect the BOK to hike rates again by 25 basis points by the end of 2026 in an attempt to tackle inflation and avoid potential second-round effects stemming from the Iran energy shock. The Bank will reconvene on 22 October.

Panelist insight: Commenting on the outlook, Ho Woei Chen, economist at United Overseas Bank, stated: “There are two remaining policy meetings this year, scheduled for Oct and Nov. We continue to expect one final 25 bps rate hike in 4Q26, which would bring the policy rate to 3.25% and likely mark the peak of the current tightening cycle. This is reinforced by the “dot-plot” and non-unanimous decision in Aug. That said, upside risks to the BOK’s tightening path remain if the Middle East conflict extends into 2027. In addition, stronger economic growth could lead to more pronounced demand-driven inflationary pressures.”

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