Bank of Korea raises rates 25 basis points to 2.75%

Brokerages are raising their forecasts for the Bank of Korea’s benchmark rate after the central bank signaled it would maintain a rate-hike stance, with Korea Investment & Securities and Hana Securities now pointing to another increase in August and a terminal rate of 3.25% to 3.50%. The Bank of Korea lifted its benchmark rate by 25 basis points to 2.75% on July 16, marking South Korea’s first rate increase since January 2023 and a return to tightening after about 3 1/2 years. The policy statement explicitly said future monetary policy needed to maintain a rate-hike stance, a firmer signal than earlier guidance that had emphasized monitoring inflation, growth and broader economic conditions before deciding on further adjustments. Korea Investment & Securities kept its year-end policy-rate forecast at 3.0% but pulled forward the timing of an additional increase to August from October, while Hana Securities projected three more hikes in August, November and February next year, which would take the terminal rate to 3.50%. Analysts said the outlook will hinge on whether stronger growth and demand-side inflation pressures are confirmed in upcoming gross domestic product, gross domestic income and updated economic-outlook data. Governor Shin Hyun-song 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 target. Analysts also said U.S. monetary policy could become a more important factor in the Bank of Korea’s reaction function if the Federal Reserve raises rates this year and next. The shift back to tightening is already feeding through to household borrowing costs. Five-year fixed mortgage rates at KB Kookmin, Shinhan, Hana, Woori and NongHyup have climbed to 4.77% to 7.49%, up by as much as 0.4 percentage point this month, while yields on five-year bank bonds have risen about 0.2 percentage point. Bank of Korea estimates show a 25-basis-point rise in mortgage rates would increase annual interest payments by about 1.8 trillion won, with average yearly borrower costs rising by about 300,000 won, and industry estimates put the increase in annual interest costs on other loans at about 1.5 trillion won.