Bank of Korea Raises Its Base Rate to 2.75 Percent in Its First Hike Since 2023
The Bank of Korea raised its benchmark base rate by 25 basis points to 2.75 percent from 2.50 percent on 16 July, its first interest rate increase since early 2023. The decision, which reversed the recent easing bias, was reported as unanimous.
The central bank pointed to persistent inflation, a weaker won and stronger-than-expected growth. Consumer price inflation has climbed back to around a two-and-a-half-year high and is expected to stay above the 2 percent target for some time, while the won has been under pressure against the dollar and first-quarter growth of 1.8 percent, led by semiconductor exports, prompted the bank to lift its full-year outlook toward 3 percent. The bank signalled that further tightening could follow.
The move narrows Korea’s rate gap with the United States rather than widening it. With the US federal funds rate held at a midpoint of 3.625 percent, the new Korean rate of 2.75 percent still sits about 0.9 percentage point below the Fed, our calculation, so the hike is aimed as much at supporting the won and anchoring inflation expectations as at cooling demand in an economy the bank now sees running hotter than it forecast.
Why it matters: Korea is one of the first major Asian economies to turn from easing to tightening in this cycle, a signal that the disinflation phase is giving way to renewed inflation vigilance in parts of Asia. A stronger won and a firmer Korean rate also matter for regional trade and for the semiconductor supply chain at the centre of the global technology cycle.
Outlook: Markets are watching for whether the Bank of Korea follows through with another increase later in the year, with attention on the next inflation prints, the won and the strength of the chip-led export recovery.
| Measure | Latest | Note |
|---|---|---|
| Base rate | 2.75 percent | Raised from 2.50 percent |
| Size of move | 25 basis points | First hike since early 2023 |
| Vote | unanimous | Reversed the easing bias |
| Gap below the Fed, our calculation | about 0.9 percentage point | Fed midpoint 3.625 less 2.75 |
| First quarter growth | 1.8 percent | Chip-export led |
Sources: Bank of Korea; Reuters; Bloomberg.
