Bank of Korea hikes rates again amid persistent inflation

The Bank of Korea delivered its second consecutive interest rate hike on Thursday, raising the benchmark seven-day repurchase rate by a quarter percentage point to 3.00%. This move, widely expected by economists, underscores persistent inflation concerns and ongoing risks to financial stability.

The central bank's monetary policy board voted for the increase, bringing the rate to its highest level since February 2025. While the BOK revised its economic growth estimate for the year upward to 3.3% from 2.6%, it maintained its inflation forecast at 2.7%. This suggests a delicate balancing act between supporting growth and curbing price pressures.

Market watchers anticipate further tightening, with the median expectation pointing to at least one more rate hike in the first quarter of 2027. Analysts believe policymakers will prioritize managing financial stability, particularly given the overheating housing market, which is contributing to underlying inflation.

Kong Dong-rak, an economist at Daishin Securities, now projects a terminal rate of 3.50%, higher than his previous forecast. Local bond markets had largely priced in Thursday's decision, with yields reflecting expectations of a prolonged tightening campaign. Investors will closely watch the updated six-month dot plot for further clues on the terminal rate and the duration of the tightening cycle.

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I now think the terminal rate is 3.50 per cent, higher than my earlier projection of 3.25 per cent as the economy could expand as much as 3.5 per cent this year.