BOK chief signals rate hike, warns of inflation risks

Bank of Korea Gov. Shin Hyun-song said Friday the central bank needs to raise its benchmark interest rate "without delay," with a focus on price stability.

Speaking at a ceremony marking the Bank of Korea's 76th anniversary at the bank's annex building Friday morning, Shin said "growth, prices and financial stability conditions are pointing relatively clearly in one direction from a monetary policy perspective."

Shin's renewed signal of a rate increase has strengthened expectations that the BOK's Monetary Policy Board will lift the benchmark interest rate from its current 2.50 percent at next month's meeting. Shin had earlier pointed in the same direction in the monetary policy statement issued May 28, saying the bank would "determine the timing of a benchmark interest rate increase while monitoring the extent to which inflationary pressures expand, the trajectory of economic improvement, and financial stability conditions." It was the first time in roughly one year and nine months — since August 2024 — that a tightening bias had been explicitly stated in a monetary policy statement.

Shin said South Korea's economy is expanding strongly, driven by robust semiconductor exports fueled by the global spread of AI, even amid heightened uncertainty surrounding the Middle East situation. He projected that "solid growth will continue" going forward, but cautioned that the economy's heavy dependence on the IT sector means sectoral gaps remain, and that warrants attention.

Concerns about rising prices, however, are mounting. Shin said that with the Middle East war now stretching beyond three months, worries about inflation have grown considerably. He added that lifestyle prices — closely tied to what consumers actually feel in their daily spending — are rising faster than the headline consumer price index and could influence household inflation expectations.

He said government price-stabilization measures would help ease upward pressure, but warned that consumer prices are expected to remain above the target level for a considerable period as the spillover effects of supply shocks broaden and demand-side price pressures intensify. He also flagged the risk that elevated household inflation expectations and the likelihood of corporate price increases — particularly as normalization of energy supply chains is delayed — could add further upward pressure on prices.

Financial stability and foreign exchange risks are also persisting. Shin noted that housing prices in the Greater Seoul area, covering both sales prices and jeonse and monthly rent, continue to climb sharply, with expectations of further gains rising again. He also pointed to a surge in so-called "debt-fueled investing" — leveraged stock purchases — as share prices have risen steeply.

On the foreign exchange market, Shin said the won-dollar rate has been fluctuating at elevated levels around 1,500 won despite rising share prices and a large current account surplus, as foreign investors have been pulling equity funds out of the country. He said the market expects the won-dollar rate to gradually stabilize, as the sizable current account surplus increases demand for the won through corporate tax payments and expanded domestic investment. At the same time, he warned that if high exchange rate volatility persists — driven by developments such as the Middle East situation — it could add to inflationary pressure through higher import prices.