BOK Set to Decide on Another Rate Hike After July Increase

The Bank of Korea will decide on Aug. 27 whether to adjust its benchmark interest rate at a monetary policy meeting, with domestic and overseas markets split evenly between a hike and a hold. There is broad agreement that the central bank entered a tightening cycle in earnest after raising rates for the first time in three and a half years last month. The main debate is over the timing and pace of further increases.

Growth and inflation data have strengthened the case for a rate increase. Still, some market participants question whether back-to-back hikes in July and August would be too much.

BOK Governor Shin Hyun-song struck a cautious tone after last month’s rate decision, saying he would keep “all options open” when asked about a possible August increase. He pointed at the time to two indicators he would watch closely: second-quarter real gross domestic product growth and July core inflation. The central bank, he indicated, would weigh strong growth driven by semiconductor exports against inflation pressure from higher oil prices linked to the Middle East.

The preliminary second-quarter growth reading later came in at 0.6%, far above the BOK’s May forecast of 0.2%. That followed a sharp rebound to 1.8% in the first quarter from minus 0.1% in the fourth quarter of last year. The economy also maintained a solid trend despite base effects. Full-year growth above 3% would remain possible if the second-half average stays above minus 0.1%.

Second-quarter real gross domestic income climbed 15.6% from a year earlier, the biggest gain since the first quarter of 1988, when it rose 16.4%. It was the highest in 38 years and three months. GDI reflects real purchasing power, and such a jump could suggest the domestic economy has greater capacity to absorb higher interest rates.

July core inflation was 2.6%, the fastest since December 2023, when it reached 2.8%, partly because of higher durable goods prices. Headline consumer inflation slowed to 2.8% in July from 3.2% in June. Even so, it remained well above the BOK’s 2.0% target.

The current-account surplus also reached a record high. June posted a surplus of $49.73 billion, more than 20% above the previous record of $38.61 billion in May. The cumulative surplus for the first six months of the year totaled $191.01 billion, the largest ever for a half-year period. That leaves an upward revision to the BOK’s full-year forecast of $250 billion looking increasingly unavoidable.

The won has recently stabilized below 1,400 per dollar, bolstering arguments for a slower pace of rate increases. Shin has repeatedly said that narrowing the policy-rate gap between South Korea and the US through a rate increase could help restore the won’s fundamental value.

By the same logic, policymakers could conclude that the urgency of another hike to address exchange-rate volatility has eased. The won fell below 1,500 per dollar on July 8 for the first time in about a month. It dropped under 1,400 on Aug. 19. On Aug. 24, it touched 1,376.5 per dollar intraday, the lowest level since Sept. 17, 2025, when it stood at 1,375.7.

Shin and the six other members of the BOK’s Monetary Policy Board will also release a dot plot showing their individual rate views for six months ahead. When the dot plot was published in May, with the benchmark rate at 2.50%, 10 of the 21 dots pointed to 3.00%, seven to 2.75%, two to 3.25% and two to 2.50%. Markets will also watch for any dissent, whether in the form of a minority call to hold if rates are raised or a minority call to hike if rates are left unchanged.

If the BOK holds rates at this meeting, markets widely view October as the most likely timing for the next increase. If it hikes, the dot plot and any dissenting views could reshape expectations for the fourth quarter and next year. Shin is scheduled to explain the decision and the monetary policy outlook at a news conference due to start at about 11:10 a.m.

Park Su-bin, Hankyung.com reporter waterbean@hankyung.com