Bank of Korea raises key rate to 3% in second straight hike

The Bank of Korea hiked its benchmark interest rate to 3.00% on Thursday, marking its second consecutive rate increase. This move returns Korea's benchmark rate to the 3% range for the first time in 18 months, since February 2024. Back-to-back rate hikes are rare for the central bank, with the last instance occurring in October and November 2022, nearly four years ago.

The decision was primarily influenced by stronger-than-expected economic indicators. Korea's real GDP expanded 0.6% in the second quarter, significantly surpassing the Bank of Korea's earlier forecast of 0.2%. Robust exports, especially those spurred by the semiconductor boom, contributed to this growth and helped offset some of the economic challenges typically associated with higher borrowing costs.

Additionally, increased purchasing power added to inflationary pressures. Real gross domestic income (GDI), reflecting households' real purchasing power, surged 3.6% from the previous quarter and 15.6% from a year ago. However, the situation also raised concerns about household debt, which surpassed 2 quadrillion won (US$1.4 trillion) for the first time by the end of June.

The overheated housing market, particularly in Seoul, further pressured the central bank to maintain a tight monetary policy stance. Financial markets anticipate that the rate-hike cycle, initiated in July, will continue for the time being.