South Korea’s central bank signals rate hike as inflation stays elevated

South Korea’s long pause on interest rates may soon come to an end as the central bank reinforces its hawkish stance.

Bank of Korea Governor Shin Hyun Song on Thursday strengthened the case for an imminent interest rate increase, telling parliament that the central bank will need to raise its benchmark rate at an appropriate time as inflation remains above its target, economic growth improves, and financial stability risks continue to mount.

His comments reinforce the Bank of Korea’s hawkish guidance ahead of its July 16 policy meeting, where investors widely expect policymakers to deliver the first rate hike after leaving the benchmark rate unchanged at 2.5% since July 2025.

The governor’s remarks are consistent with the central bank’s policy shift in May, when it upgraded its 2026 growth forecast and signaled that inflation, stronger economic activity, exchange-rate developments, and financial imbalances were increasingly supporting tighter monetary policy.

The BOK said South Korea’s economy remains on a solid footing thanks to robust semiconductor demand, while inflation is expected to stay elevated as stronger domestic consumption offsets some of the relief from lower oil prices.

The central bank also cautioned that financial imbalances are becoming more pronounced, with home prices rising rapidly across the Greater Seoul area and leverage-fueled investment increasing.

Policymakers said they remain prepared to stabilize markets as geopolitical tensions, uncertainty surrounding global monetary policy, and AI-driven investment continue to contribute to elevated market volatility.

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