South Korea central bank to raise rates for first time in over three years on July 16: Reuters poll

BENGALURU — South Korea's central bank is expected to raise interest rates on Thursday (July 16) for the first time in more than three years and deliver another increase by the end of the year, according to a Reuters poll of economists, as inflation remains well above its two per cent target.

Consumer inflation accelerated to a two-and-a-half year high of 3.2 per cent in June, remaining above the Bank of Korea's two per cent target for a fourth consecutive month. 

It is expected to average around three per cent through the second half of the year, paving the way for the start of a tightening cycle.

Stronger economic growth, rising house prices and elevated household debt have given policymakers room to tighten. 

The economy grew at its fastest pace in nearly six years in the first quarter and BOK Governor Shin Hyun-song said it was necessary to raise interest rates as inflation was expected to exceed the BOK's target for a considerable period of time amid high oil prices triggered by the US-Israeli war on Iran.

All but one of 37 economists in the July 7 to 13 Reuters poll expected the BOK to raise its base rate to 2.75 per cent on July 16.

"It was relatively well broadcasted at the last meeting, when the BOK raised both its growth and inflation forecasts," said Bum Ki-son, an economist at Barclays. 

"The governor made it clear that (the bank's) mandates were, on a rare occasion, not conflicting but pointing in the same direction for a hike. We think this meeting is likely to be one where they will deliver that hike."

Central banks in Australia, New Zealand, Indonesia and the Philippines have already tightened policy.

A majority of economists, 28 out of 31, expected one more rate hike by the end of the fourth quarter, taking the policy rate to 3.00 per cent. While one forecast the key rate at 3.25 per cent, the remaining two predicted 2.75 per cent.

The dot plot released in May also showed that a majority of board members projected the policy rate would reach three per cent over the next six months.

Median forecasts showed the BOK would raise its key rate to 3.25 per cent in the first quarter of 2027 and keep it there through at least the end of next year, 25 basis points higher than forecast in the May survey.

That hawkish outlook reflects expectations of above-target inflation and strong economic growth. Inflation was expected to average 2.7 per cent this year and 2.2 per cent next year, while gross domestic product was expected to grow 2.8 per cent in 2026 and 2.1 per cent in 2027.

Elevated price pressures are expected to be driven largely by high global oil prices, stoked by the resumption of the Iran war. 

Supply-side pressures have also been aggravated by a weaker South Korean won, which has fallen more than four per cent so far this year, increasing the cost of imported raw materials.

The won is expected to weaken more than one per cent by the end of July, a separate Reuters poll showed.

"We expect KRW weakness to be a key focus," said Benson Wu, Korea economist at BofA Global Research. "While policymakers have intensified verbal intervention and coordinated messaging across ministries in recent weeks, the impact on the won appears to have been limited."

"Accordingly, we will be watching closely for any signals that could open the door to back-to-back rate hikes," Wu added, though he said that was not BofA's base case.

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