South Korea: Faster hiking path – DBS

DBS Group Research economist Ma Tieying analyzes the latest Bank of Korea (BoK) decision, noting a hawkish shift as the base rate is raised to 2.75%. The report now anticipates a faster tightening cycle, with the policy rate reaching 3.25% by year-end 2026. Growth is expected to benefit from the AI-driven semiconductor sector, while Consumer Price Index (CPI) inflation is projected to overshoot target.

BoK signals accelerated tightening cycle

"The Bank of Korea raised the base rate to 2.75% from 2.50% at its July 16 meeting, marking the first rate hike since January 2023. The BOK maintained a hawkish stance and signaled that further rate increases are likely, although it provided no guidance on the timing of future moves."

"The BoK’s hawkish messaging suggests that the rate hike cycle could proceed faster than we previously anticipated. We had expected a total of 50bps of hikes in 2H26 (one in 3Q and one in 4Q)."

"We now expect a cumulative 75bps increase in 2H26, implying two additional 25bps hikes over the remaining three policy meetings this year (August, October, and November), bringing the policy rate to 3.25% by year-end."

"We do not expect significant upside surprises in real GDP growth during 2H26, as the current AI boom is likely to boost semiconductor export prices and corporate profitability more than export volumes or industrial output."

"However, we expect CPI inflation to continue rising and overshoot the BoK’s target, reaching around 3.5% YoY in 2H26, as energy cost pass-through effects persist and stronger export revenues and corporate profits translate into higher wages and demand-driven inflation pressures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)