BOK raises benchmark rate to 3% as inflation woes persist

The Bank of Korea (BOK) on Thursday raised its benchmark interest rate by 0.25 percentage points to 3 percent, delivering a rare consecutive hike as inflationary pressures persist amid Middle East uncertainties.

The BOK also revised up its 2026 growth forecast to 3.3 percent from the 2.6 percent projection announced in May, as robust semiconductor exports continued to support the economy.

The central bank's Monetary Policy Board voted to raise the benchmark rate for a second straight meeting following its July hike, bringing the rate back to the 3 percent range for the first time since November 2024.

It is highly unusual for the BOK to raise its benchmark rate in back-to-back meetings immediately after beginning a rate-hike cycle, signaling an accelerated pace of monetary tightening.

Six members of the Monetary Policy Board voted for the rate hike, while one dissented in favor of keeping the rate unchanged, according to the BOK.

"This consecutive rate hike was a departure from the usual practice. It has sent a strong signal to the market," Gov. Shin Hyun-song said during a press conference following the policy meeting.

Shin said the board members had determined that a preemptive monetary policy response was necessary to contain inflation concerns.

"By acting preemptively before price increases spread further, we can ultimately reduce the costs the economy has to bear," he said.

The policy board's dot plot released the same day showed a median projection of 3.25 percent for the benchmark rate over the next six months, suggesting that further rate hikes remain on the table.

Shin said the central bank would first need to assess the effects of the two consecutive increases before making further decisions.

"Since we have raised rates twice in a row, we need to assess their effects going forward. Upcoming policy meetings will be 'live' meetings, meaning that we will make decisions depending on market conditions," he said.

Yet the top monetary policymaker acknowledged concerns that the rapid pace of rate hikes could add to the burden on vulnerable borrowers. Household debt surpassed 2,000 trillion won ($1.44 trillion) for the first time in the second quarter, reaching a record high.

"We are communicating closely with the government on the issue, and the government's economic growth plan for the second half of the year also includes measures to support vulnerable borrowers," Shin said.

Regarding the revised growth forecast of 3.3 percent, the central bank said the significant upgrade reflected stronger-than-expected semiconductor demand, which has supported continued growth in exports and investment, as well as a gradual recovery in consumption.

The revision from 2.6 to 3.3 percent marked the largest upward adjustment since May 2021, when the BOK raised its growth forecast for that year by 1 percentage point to 4 percent.

The growth forecast for 2027 was also raised to 2.9 percent from 2.1 percent, as it expects robust growth to continue for an extended period.

Shin said stronger-than-expected growth would bring forward the timing of when Korea's gross domestic growth gap is expected to turn positive, meaning actual economic output would exceed the economy's potential level.