By Cynthia Kim and Jihoon Lee
SEOUL, Aug 27 (Reuters) – The Bank of Korea on Thursday raised its benchmark interest rate by a quarter percentage point to 3.00%, as expected, delivering a second straight increase as inflation stays above target and financial stability risks persist.
The seven-member monetary policy board at the BOK voted to raise the seven-day repurchase rate to the highest level since February 2025, a decision predicted by 18 of 35 economists surveyed in a Reuters poll.
The BOK also revised up this year’s growth estimate to 3.3% from the 2.6% projected in July. It left this year’s inflation forecast unchanged at 2.7%.
The median expectation is now for one more rate hike in the first quarter of 2027 and then a hold through to at least the end of next year, as analysts expect policymakers to put more emphasis on managing financial stability amid an overheating housing market while strong growth feeds into underlying inflation.
“The economy is strong enough to absorb today’s increase, but the case for further hikes is less clear,” Gareth Leather, an economist at Capital Economics wrote after the rate decision.
“With the currency strengthening, inflation easing and domestic demand still weak, we think the BOK will be under less pressure to raise rates further, despite the economy’s strong headline growth.”
The BOK’s hawkish hike to 3.00% aligns with a global central bank environment marked by severe division, with the Federal Reserve maintaining restrictive rates and the Bank of Japan taking a cautious approach to a fragile recovery.
The BOK is fighting domestic inflationary pressures and a hot housing market, just as geopolitical tensions threaten to push global import costs higher.
Investors in the coming weeks will be focused on Chinese and U.S. demand indicators and emerging inflation data to determine if the BOK’s extended tightening cycle becomes the global norm.
Local bond markets had already priced in much of Thursday’s move, and yields reflect a market bracing for a longer tightening campaign.
South Korea’s policy-sensitive treasury bond futures traded down 0.03 points to 103.29 as of 0149 GMT, erasing earlier losses of 0.28 points after the central bank’s forward guidance.
In the updated six-month dot plot, refreshed for the first time since May, a policy rate of 3.25% emerged as the most probable outcome for end-2026, with 10 of the 21 dots clustered at that level. Six dots pointed toward a higher peak of 3.50%. The remaining five dots favored holding steady at 3.00%.
Governor Shin Hyun-song will hold a news conference at 0210 GMT.
(Reporting by Cynthia Kim; Editing by Sam Holmes)
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