BOK Unanimously Raises Rate to 2.75%, Says Growth Will Top 2.6% Forecast

The Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75% from 2.50% and signaled more tightening could follow. All seven members of the Monetary Policy Board backed the July 16 decision.

The BOK said after a monetary policy meeting on July 16 that it would maintain the base rate at 2.75% until its next rate-setting decision.

The central bank also raised the rate on its Financial Intermediation Support Facility loans by 25 basis points to 1.25% from 1.00%, effective that day.

The board cited stronger growth led by exports and investment, along with inflation that is likely to stay high for the time being, as reasons for the rate increase. The BOK said exports and facility investment have continued to post strong gains on the back of a robust semiconductor cycle, while consumption is recovering as income conditions improve. It added that this year's economic growth would significantly exceed the 2.6% forecast it presented in May.

The central bank said inflation pressures remain in place. Consumer prices rose 3.2% in June, driven by higher petroleum and agricultural, livestock and fisheries prices. Core inflation held at 2.5%. The BOK said inflation will remain above its target for a considerable period as previously elevated cost pressures persist and demand-side pressures gradually increase.

Financial-market instability also influenced the decision. The won-dollar exchange rate briefly climbed into the mid-1,500 won range before easing to the 1,480 won range, but volatility remains high. The BOK said it must continue to monitor exchange-rate swings, rising home prices in the Seoul metropolitan area and faster growth in household debt.

The central bank said monetary policy would need to remain on a tightening path. It said the timing and pace of any additional rate increases would be determined after assessing inflation pressures, the recovery in economic activity and financial-stability conditions.

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com