Bank of Korea Governor Shin Hyun-song emphasized on July 29 at the National Assembly that the central bank needs to continue its rate hike stance after raising the base rate to 2.75% in July. The timing and pace of additional rate increases will be determined by monitoring inflation pressure, economic improvement, and financial stability. South Korea's economy has expanded on semiconductor-driven export and investment growth fueled by global AI proliferation, while inflation is projected to remain above the target level for a considerable period due to oil price uncertainty, elevated cost and exchange rate impacts, and expanding demand-side pressure from income improvements.
BOK Signals Continued Rate Hike Stance After July Increase
Governor Shin stated in his remarks to the Finance and Economy Planning Committee that the Bank of Korea raised the base rate from 2.5% to 2.75% at the July meeting after considering all policy conditions. He affirmed that the central bank judges it necessary to continue the rate hike stance going forward. The timing and pace of additional increases will be determined by examining the degree of inflation pressure, the trend of economic improvement, and financial stability conditions.
Semiconductor Sector Drives Export and Investment Growth
The BOK assessed that South Korea's economy has expanded its growth momentum. Governor Shin stated that exports and investment centered on the semiconductor sector have sustained high growth rates due to global AI proliferation, while consumption has also shown favorable trends. He projected that robust growth will continue as the semiconductor boom persists and its effects gradually spread to other sectors.
Inflation Projected to Exceed Target on Cost and FX Pressures
The central bank projected that inflation will continue rising above the target level for a considerable period. Governor Shin noted that uncertainty in oil price movements persists depending on Middle East developments, while the impact of elevated costs and exchange rates continues and demand-side pressure is gradually expanding due to income improvements. He stated that inflation will maintain an upward trend exceeding the target level for a considerable period.
FX and Stock Markets Show High Volatility
The BOK evaluated that major price variables in financial and FX markets have shown expanded volatility as external uncertainties increased. The USD-KRW exchange rate rose significantly due to Middle East uncertainty and dollar strength, then fell to the mid-to-high 1,400 won range after July as FX supply-demand improved. Government bond yields rose considerably due to domestic and international inflation concerns and changes in monetary policy expectations, then fluctuated depending on Middle East developments. Stock prices showed high volatility and adjusted significantly due to AI investment-related concerns and large-scale net selling by foreigners.
Governor Shin assessed that the domestic financial system has maintained overall stability despite high external uncertainty, supported by expanded real economic growth and financial institutions' sound resilience. However, he pointed out that risks from high financial and FX market volatility and accumulating financial imbalances due to expanding housing price increases in the metropolitan area remain as potential concerns.
BOK Implements 24-Hour FX Market Opening and Swap Programs
The central bank implemented a 24-hour FX market opening on the 6th to improve accessibility to FX and capital markets, and is pursuing the establishment of an offshore won settlement system. To stabilize the FX market and improve supply-demand conditions, the BOK extended interest payments on excess FX reserves in June and is conducting FX swaps with the National Pension Service.
Governor Shin stated that the BOK has actively promoted financial and FX market stability through coordination with the government under high domestic and external uncertainty, and is pursuing institutional improvements to respond to changes in the financial and economic environment. He announced that the central bank will build a stable and efficient digital currency ecosystem in response to digital transformation, and present policy alternatives from a neutral and long-term perspective on structural issues including low birth rates, aging population, balanced regional development, and climate change.
FAQ
Why did the Bank of Korea raise the base rate to 2.75% in July?
The BOK raised the base rate from 2.5% to 2.75% at the July meeting after considering all policy conditions. Governor Shin stated that inflation is projected to remain above the target level for a considerable period due to oil price uncertainty, elevated cost and exchange rate impacts, and expanding demand-side pressure from income improvements, while the economy has shown expanded growth momentum driven by semiconductor exports and investment.
What FX market measures has the BOK implemented recently?
The BOK implemented a 24-hour FX market opening on the 6th and is pursuing an offshore won settlement system to improve market accessibility. The central bank extended interest payments on excess FX reserves in June and is conducting FX swaps with the National Pension Service to stabilize the FX market and improve supply-demand conditions.
