DBS Group Research economist Ma Tieying examines the latest decision by the Bank of Korea (BoK), noting the hawkish shift in raising the base rate to 2.75%. The report now projects a faster tightening cycle, with the interest rate reaching 3.25% by the end of 2026. Economic growth is expected to be driven by the AI-powered semiconductor sector, while Consumer Price Index (CPI) inflation is expected to exceed target.

BoK signals acceleration of the 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 increase since January 2023. The BoK maintained a hawkish stance and signaled that further rate increases were likely, although it gave no indication of a timeline for future moves.”

“The hawkish BoK statement suggests that the cycle of interest rate increases may be faster than previously expected. We expected a total of 50 basis points in the second half of 2026 (one in Q3 and one in Q4).”

“We now expect a cumulative increase of 75 basis points in the second half of 2026, which means two additional increases of 25 basis points over the remaining three policy meetings this year (August, October and November), which will raise the policy rate to 3.25% by the end of the year.”

“We do not expect significant upward surprises in real GDP growth in the second half of 2026, as the current AI boom is likely to boost semiconductor export prices and corporate profitability more than export volumes or industrial production.”

“However, we expect CPI inflation to continue rising and exceed the BoK target, reaching around 3.5% y/y in the second half of 2026, as the pass-through effect of energy costs persists and higher export earnings and corporate profits translate into higher wages and demand-driven inflation pressures.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor. Find out more.)