BOK Tightening Signal Spurs Bets on August Rate Hike, Terminal Rate Seen at 3.25%-3.50%

Brokerages are lifting their forecasts for South Korea’s benchmark interest rate after the Bank of Korea formally signaled it will keep tightening. Analysts now point to August for the next increase, with the terminal rate in this cycle projected at 3.25% to 3.50%. Mortgage rates at commercial banks are also rising quickly, setting up heavier interest burdens for households.

As of July 17, Korea Investment & Securities and Hana Securities both projected after the Monetary Policy Board meeting a day earlier that the next rate increase will come in August. Korea Investment & Securities kept its year-end benchmark rate forecast at 3.0% but pulled forward the timing of an additional hike to August from October. It sees the terminal rate for this cycle at 3.25%.

The Bank of Korea’s Monetary Policy Board raised the benchmark rate by 25 basis points to 2.75% from 2.50% on July 16. It was the first rate increase since January 2023, about three and a half years earlier.

Korea Investment & Securities expects the BOK to raise rates in both July and August this year before assessing the impact of the policy moves. If additional upside pressure on growth and inflation is confirmed, the central bank could deliver one more increase in the first quarter of next year. Otherwise, the benchmark rate would remain around 3.0% for an extended period.

Moon Da-woon, an analyst at Korea Investment & Securities, said the BOK is likely to move ahead with another rate increase after confirming improved income conditions through gross domestic product and gross domestic income data and revising its August economic outlook. He added that stronger growth alone would not necessarily translate into more rate hikes, given that semiconductor price gains are set to moderate from the fourth quarter and the recovery in private-sector employment remains slow.

Hana Securities also raised the possibility of more aggressive tightening by the BOK. It forecasts three additional rate increases in August, November and February next year, which would take the terminal rate to 3.50%. That is 25 basis points above its previous forecast of 3.25%.

Hana Securities said the BOK began factoring demand-side inflation pressures into its policy assessment at the Monetary Policy Board’s May meeting. It then lifted its forecast for South Korea’s economic growth this year to 3.3%. With the BOK also signaling a sharp upward revision to its growth outlook, the firm expects the central bank to step up its guard against demand-driven inflation.

US monetary policy was also cited as a factor that could shape the BOK’s rate path. Park Jun-woo, an analyst at Hana Securities, said US interest rates would be added to the BOK’s reaction function alongside growth, inflation and financial stability, as the Federal Reserve is expected to raise rates this year and next. The pace and size of benchmark-rate increases could therefore outstrip earlier forecasts, he added.

The policy statement drew particular market attention. In its July 16 decision, the Monetary Policy Board said future monetary policy needs to maintain a rate-hike stance. Earlier statements had said the board would judge whether further adjustments were needed while monitoring inflation, growth and broader economic conditions. This time, it explicitly referred to a “rate-hike stance,” making the direction of further tightening clear.

BOK Governor Shin Hyun-song also left little doubt about the possibility of further increases. At a press briefing, he said demand-side inflation pressure should not be overlooked and that the central bank would keep responding until it was confident inflation was converging stably toward the target.

With the Bank of Korea formally shifting back to a tightening stance, mortgage rates are also set to keep rising. Five-year fixed mortgage rates at the country’s five biggest banks — KB Kookmin, Shinhan, Hana, Woori and NongHyup — have risen by as much as 0.4 percentage point this month, reaching 4.77% to 7.49%. Yields on five-year bank bonds, the benchmark for fixed-rate home loans, have also climbed about 0.2 percentage point this month, pushing lending rates higher.

Borrowers also face heavier debt-servicing costs as rates rise. Bank of Korea estimates show that a 25-basis-point increase in mortgage rates would lift annual interest payments by about 1.8 trillion won ($1.3 billion). That would raise the average annual interest burden per borrower by about 300,000 won ($217). Industry estimates show annual interest costs on other loans, including unsecured credit loans, would rise by about 1.5 trillion won ($1.09 billion).

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com