Bank of Korea raises rates and signals further tightening

South Korea's central bank raised interest rates on Thursday for the first time in more than three years and signalled that more increases may follow, citing strong growth linked to the artificial intelligence chip boom, persistent inflation and risks to financial stability.

A Bank of Korea official said the Monetary Policy Board raised the benchmark rate from 2.5 percent to 2.75 percent. The increase was the first since January 2023, when the bank lifted the policy rate by 25 basis points to 3.5 percent during its post-pandemic policy normalisation cycle.

The Bank of Korea said it was appropriate to raise the rate because economic growth has been strengthening and inflation is expected to stay above the target level for a considerable period. It also said risks to financial stability continue to persist.

The bank has been leaning toward tighter policy because of stubbornly high inflation, a weaker won and an economy supported by strong semiconductor exports. Rising home prices and elevated household debt have also strengthened the case for higher rates.

South Korea's economy grew at its fastest pace in nearly six years in the first quarter as exports rose on demand for chips used in artificial intelligence. The government this week raised its 2026 growth forecast by one percentage point to 3 percent, citing the strong performance of memory chipmakers as AI demand grows.

Record profits from Samsung Electronics and SK hynix, whose advanced memory chips are used in the AI sector, have supported optimism about the country's economic outlook. Consumer prices rose 3.2 percent in June from a year earlier, partly because of higher energy costs and supply-chain disruptions linked to the Iran war.

The Bank of Korea said it remains necessary to closely monitor high exchange-rate volatility, rising housing prices in the Seoul metropolitan area and accelerating household debt. It said the board considers it necessary to maintain its policy of raising interest rates. The bank said the timing and pace of further increases will depend on assessments of inflationary pressures and financial-stability conditions.

Dave Chia, an economist at Moody's Analytics, said the increase marked the start of a tightening cycle rather than a one-off move. He said oil was putting the most pressure on prices because the Middle East conflict had kept crude costly for an economy heavily reliant on imported energy. He also said a weak won increases pressure through import prices.