The South Korean Central Bank has restarted interest rate hikes after three and a half years.
According to a report by Reuters on July 16, the Bank of Korea announced that it would raise its benchmark interest rate by 25 basis points to 2.75%. This is the first rate hike in three and a half years. The Bank of Korea stated that this move is aimed at stabilizing the continuously weakening won and addressing the rising inflation pressure.
The South Korean Central Bank's monetary policy committee decided to raise interest rates on that day. Previously, among 37 economists surveyed by Reuters, all but one expected the South Korean Central Bank to take this action, and the final decision was in line with market expectations.
According to Reuters, since the beginning of this year, the exchange rate of the Korean won against the US dollar has depreciated by about 3.4%. The inflation level in South Korea has also risen to a two-and-a-half-year high, prompting the central bank to tighten monetary policy again.
Meanwhile, driven by a recovery in global semiconductor demand, South Korea's chip exports and investment have grown beyond expectations, indicating clear signs of economic recovery. In the first quarter of this year, South Korea's GDP increased by 1.8% year-on-year, the fastest growth rate in nearly six years. As a result, the South Korean government has raised its economic growth forecast for this year to 3.0%.
The market generally believes that the South Korean Central Bank’s interest rate hike may not be the end of things. Most analysts expect that the South Korean Central Bank may hike rates once more before the end of this year, pushing the benchmark interest rate to 3%.
Analysts point out that the South Korean Bank of Korea is under pressure from two sides: on one hand, the recovery in semiconductor exports is driving economic growth; on the other hand, there remains inflation risk due to the depreciation of the won and rising energy prices. This interest rate hike reflects the South Korean Bank of Korea's attempt to find a balance between economic growth and price stability.
