Bank of Korea delivers back-to-back rate hikes as price pressures persist

The Bank of Korea increased its key interest rate by a quarter percentage point to 3.00 percent on Thursday, marking the second consecutive hike as inflation remains higher than the target and financial stability risks persist. The seven-member monetary policy board voted to raise the seven-day repurchase rate to its highest level since February 2025.

This decision was predicted by 18 out of 35 economists surveyed in a Reuters poll. The central bank also raised its forecast for the country's economic growth for the year to 3.3 percent from 2.6 percent projected in July, while keeping its inflation forecast at 2.7 percent. Economists expect one more rate increase in the first quarter of 2027, with a hold through at least the end of next year.

Gareth Leather, an economist at Capital Economics, stated that the economy is strong enough to handle the current increase, but further hikes are less certain due to a strengthening currency, easing inflation, and weak domestic demand. The decision comes amid a split among global central banks, with the Federal Reserve maintaining higher rates and the Bank of Japan taking a cautious stance towards a fragile economic recovery.

The Bank of Korea is dealing with domestic inflationary pressures and a heated housing market, while geopolitical tensions may lead to higher global import costs. Investors will closely monitor Chinese and US demand indicators and emerging inflation data in the coming weeks to determine if the Bank of Korea's extended tightening cycle could turn into a broader trend.

South Korean bond markets had already factored in the rate hike, with yields reflecting expectations of sustained tightening. The policy rate of 3.25 percent emerged as the most probable outcome for the end of 2026 based on a six-month dot plot, with 10 of 21 dots clustered at that level. Governor Shin Hyun-song will give a news conference at 0210 GMT.