South Korea raised its interest rate for the first time in more than three years on July 16, in a bid to combat inflation brought on by the war in the Middle East and slow the growth of the country’s high household debt.
After a monetary policy meeting, the Bank of Korea (BOK) hiked its benchmark policy rate from 2.5 percent to 2.75 percent, the first such move since January 2023.
All seven members of the Monetary Policy Board voted unanimously in favor of the decision.
“Along with economic growth having strengthened, led by exports and investment, inflation is expected to remain above the target level for a considerable time, and financial stability risks also persist. The Board, therefore, judged that it is appropriate to raise the Base Rate by 25 basis points,” the central bank said in a statement released after the meeting.
It added that “currently available information” suggests the global economy “is expected to continue its moderate growth trend, driven by robust AI investment,” saying that it would do so, “despite continued uncertainty surrounding the situation in the Middle East.”
The bank further stated that “inflation is projected to remain elevated for some time as the impact of the rise in energy prices feeds through with a time lag.”
Rates had been kept steady or lowered by the BOK in recent years despite concerns around soaring household debt and real estate prices, but policymakers now see room to increase borrowing costs with the economy performing better than expected, due to robust semiconductor exports brought about by the global AI boom.
The South Korean government raised the country’s 2026 growth outlook to 3 percent on July 14, the highest annual growth rate since 2021.
Consumer price inflation went above 3 percent in both May and June, above the bank’s 2 percent target, driven by higher energy costs.
South Korea has been particularly affected by the war between the United States and Iran and the ensuing closure of the Strait of Hormuz, due to the nation’s heavy reliance on Gulf oil, with energy prices, financial markets, and industrial production all taking a hit in recent months.
According to the Center for Strategic and International Studies (CSIS), 70 percent of the oil Seoul relies on is usually routed through the strait, and, since the effective choking off of supplies via the waterway, the country has seen a sharp spike in domestic oil and liquid natural gas (LNG) prices, its KOSPI stock index suffered its worst single-session drop in its 43-year history, and its currency, the won, hit a 17-year low.
The rise in the cost of oil caused the government in Seoul to impose maximum price caps on gasoline, diesel, and kerosene in March, which the authorities now adjust on a monthly basis.
On June 26, South Korean Finance Minister Koo Yun-cheol said that this cap would be lowered when it is next reviewed, but did not say by how much.
In addition to inflation and energy worries, there is also concern about rising household debt, with higher real estate prices in Seoul and the surrounding metropolitan areas and a rally in technology stocks fueling borrowing.
Despite the country’s chip-driven growth, the job market continues to be sluggish, particularly in manufacturing, according to the South Korean Ministry of Data and Statistics.
Bank of Korea Governor Shin Hyun-Song said the rate hike was necessary given “developments across all three areas—growth, inflation, and financial stability,” at a press conference in Seoul.
“Unlike major countries with weak economic recoveries, demand-side inflationary pressures are expected to gradually increase as the impact of the semiconductor boom spills over into domestic demand,” he added.
“In conducting monetary policy, we will continue to take action until we are confident that the inflation rate is converging steadily toward our target level,” Shin said at the same press conference, according to Yonhap.
He said that the BOK will decide how aggressively to tighten monetary policy based on upcoming economic data, including second-quarter GDP figures due next week and July inflation data to be released next month.
The BOK’s next rate-setting meeting is due to take place on Aug. 27.
