South Korea’s central bank raised interest rates Thursday for the first time in more than three years as an artificial intelligence-driven chip boom helps fuel sticky inflation and faster-than-expected economic growth.The Bank of Korea increased the seven-day repurchase rate by a quarter point to 2.75%, in line with the expectations of all economists surveyed by Bloomberg. The move marks the start of a new policy cycle after officials cut borrowing costs four times since late 2024. The last hike was in January 2023.
The decision caps months of increasingly hawkish messaging from the central bank. Since leading his first policy meeting in May, Governor Shin Hyun Song has repeatedly asserted that inflation, economic growth, exchange rates and risks to financial stability all pointed in the same policy direction, minimising the trade-offs that typically complicate monetary policy decisions.
Authorities have upgraded their growth outlooks several times, with the latest revision coming earlier this week, when the government said it now expects gross domestic product to expand 3% this year. Last week, the International Monetary Fund gave South Korea the largest upward revision to its growth outlook among the world’s 30 major economies, lifting its 2026 forecast to 2.6%.The hike marks the start of what investors expect will be a tightening cycle that carries over into next year. Markets are already debating how quickly the central bank might move again.“The BOK is expected to retain a hawkish bias and leave the possibility of further tightening on the table,” Jemin Choi, an economist at Hyundai Motor Securities Co., said by phone. “Still, they’re more likely to maintain their current stance rather than turn more hawkish, as risks related to inflation, the currency and the conflict in the Middle East persist but have not materially worsened.”While oil prices remain elevated, second-round inflationary effects have yet to materialize. In addition, wage growth is slowing, the won has strengthened recently and concerns surrounding repo funds are likely to keep the BOK from conducting a back-to-back hike at its next decision on Aug. 27, according to Lim Jae-kyun, a fixed-income analyst at KB Securities.Also Read: Asian shares fall led by South Korea’s Kospi, oil extends gainThe policy shift follows a sharp improvement in South Korea’s economic backdrop. A semiconductor-led export boom pushed South Korea’s current-account surplus in the first five months of this year beyond 2025’s record annual total, helping the economy grow by a faster-than-expected 1.8% in the first quarter.The BOK has increasingly argued that the current chip upcycle differs from previous ones in that it’s being driven by structural demand related to AI. Competitive investment by global technology firms, coupled with supply constraints for advanced chips such as high-bandwidth memory, should keep the expansion going for an extended period, the bank said in a statement to a local lawmaker earlier this week.At his press conference later Thursday, Shin may be asked to respond to comments from Federal Reserve Chairman Kevin Warsh pushing back on the idea that surging investment into AI is stoking inflation. Warsh said Wednesday that the boom won’t necessarily lead to persistent price pressures.Korea’s inflation has remained stubbornly high. Consumer prices rose 3.2% in June from a year earlier, the fastest pace in more than two years. Policymakers expect underlying price pressures to remain elevated as earlier increases in oil prices continue to feed through the economy. The government expects inflation will average 2.6% this year.Financial stability concerns have become an increasingly important driver of policy. Apartment prices in Seoul have climbed for 75 consecutive weeks, household borrowing has started to accelerate again and policymakers have repeatedly warned that leverage-fueled investment could amplify broader financial imbalances. In the BOK’s latest Financial Stability Report, the central bank said higher interest rates would be needed “at an appropriate time” to contain those risks.While the Korean won has strengthened of late, it has slumped through most of the year, sliding in June to its weakest level against the dollar since 2009. Policymakers have repeatedly cited currency weakness as another factor strengthening the case for tighter monetary policy.When Shin briefs reporters later Thursday, investors will focus on his assessment of stronger-than-expected growth, broadening inflation pressures and rising financial stability risks.
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