For the first time in over three years! The Bank of Korea raised interest rates on Thursday, with inflation and the depreciation of the Korean won driving a shift towards a hawkish policy.

Survey polls of economists show that due to inflation still far above its 2% target, the Bank of Korea is expected to raise interest rates for the first time in over three years on Thursday, with another rate hike expected before the end of the year. Consumer inflation in June accelerated to 3.2%, reaching a new high in two and a half years. This marks the fourth consecutive month that the data has been above the Bank of Korea's 2% target. It is expected that inflation will average around 3% in the second half of the year, paving the way for a tightening cycle. Stronger economic growth, rising house prices, and high household debt provide policymakers with room to tighten policy. The first quarter saw the fastest economic growth in nearly six years. Bank of Korea Governor Shin Hyun-song stated that with high oil prices due to the US-Iran war, inflation is expected to exceed the Bank of Korea's target for a considerable period, making it necessary to raise interest rates. In a survey conducted from July 7 to 13, all but one of the 37 economists surveyed expect the Bank of Korea to raise the base rate to 2.75% on July 16. Barclays economist Bum Ki Son said, "At the last meeting, the Bank of Korea also raised its economic CKH HOLDINGS inflation forecast, which has already sent a relatively clear signal. The Governor clearly stated that in very few cases, the Bank's various responsibilities do not conflict, but point in the same direction of rate hikes. We believe that this meeting is likely to be the point where they implement the rate hike." Central banks in Australia, New Zealand, Indonesia, and the Philippines have already tightened policy. Most economists (28 out of 31) expect another rate hike by the end of the fourth quarter, pushing the policy rate to 3.00%. While one predicts a key rate of 3.25%, the other two forecast 2.75%. The dot plot released in May also indicates that most board members expect the policy rate to reach 3% within the next six months. The median forecast shows that the Bank of Korea will raise the key rate to 3.25% by the first quarter of 2027 and will maintain it at least until the end of next year, 25 basis points higher than the forecast in May. This hawkish outlook reflects expectations of above-target inflation and robust economic growth. Average inflation is expected to be 2.7% this year and 2.2% next year, while GDP is expected to grow by 2.8% in 2026 and 2.1% in 2027. Rising price pressures are expected to be mainly driven by high global oil prices, fueled by the resurgence of the Iran war. The weakening of the South Korean won has also exacerbated supply-side pressures, with the won falling by over 4% so far this year, raising the cost of imported raw materials. Another survey indicates that the Korean won is expected to further depreciate by over 1% by the end of July. Benson Wu, a South Korea economist at Bank of America Global Research, said, "We expect the depreciation of the won to be a key focus. Although policymakers have strengthened verbal interventions in recent weeks and coordinated information dissemination among ministries, the impact on the won seems limited." Benson Wu added, "Therefore, we will closely monitor any signals that may open the door to consecutive rate hikes." However, he also noted that this is not Bank of America's baseline forecast scenario.