Bank of Korea raises key rate to 2.75%, first hike in three years

• The Bank of Korea raised its benchmark policy rate by a quarter percentage point to 2.75% on July 16, the first increase since January 2023.
• Consumer price inflation exceeded 3% in both May and June, above the bank’s 2% target, as higher energy costs from the U.S.-Iran war and a weak won pushed up prices.
• The government on Tuesday raised South Korea’s 2026 growth outlook to 3%, citing robust semiconductor exports tied to global AI spending.
• The bank had kept rates steady or lowered them in recent years to shield the economy from geopolitical shocks and U.S. tariff increases under President Donald Trump.

Chip-driven growth allows rate hike after three-year pause

Following a monetary policy meeting Thursday, the Bank of Korea raised its benchmark policy rate by a quarter percentage point from 2.5% to 2.75%, the central bank said. The increase, the first since January 2023, marked a turning point after a prolonged period in which the bank prioritized supporting the trade-dependent economy through repeated external shocks.

The central bank had held borrowing costs steady or cut them in recent years even as household debt and real estate prices rose, according to the Bank of Korea. Policymakers judged that the risks of tighter policy — slowing an economy buffeted by the war in the Middle East and tariff hikes imposed by President Donald Trump — outweighed inflation concerns.

Those calculations have shifted as the economy outperforms earlier expectations. The government on Tuesday raised its 2026 growth forecast to 3%, which would be the highest annual expansion since 2021. The upgrade reflects surging semiconductor exports tied to the global boom in artificial intelligence spending.

Consumer price inflation remained above 3% in both May and June, the central bank said, exceeding its 2% target. The bank attributed the price pressures to higher energy costs stemming from the U.S.-Israel war with Iran and the weakness of the South Korean won. Analysts cited by the central bank said the won’s decline is linked to the country’s dependence on imported energy and foreign capital flows.

The rate decision ends a streak that began in January 2023, when the bank last raised rates. Since then, the bank has faced rising household debt and real estate prices while also navigating the fallout from sweeping tariff hikes imposed by U.S. President Donald Trump.

Policymakers now see room to tighten, according to the Bank of Korea, as the chip-driven growth improves the economic outlook and gives the central bank more latitude to address inflation and debt risks.