South Korea’s central bank on Thursday raised its key interest rate for the first time in more than three years, aiming to tighten money supply to combat inflation worsened by the intensifying war in the Middle East and slow the growth of the country’s high household debt.
Following a monetary policy meeting, the Bank of Korea raised its benchmark policy rate by a quarter percentage point from 2.5% to 2.75% in the first hike since January 2023.
The bank had kept rates steady or lowered them in recent years despite concerns about soaring household debt and real estate prices, prioritizing support for the country’s trade-dependent economy in the face of geopolitical turmoil and U.S. President Donald Trump’s sweeping tariff hikes.
But policymakers now see room to increase borrowing costs with the economy performing better than expected, thanks to robust semiconductor exports driven by the global boom in artificial intelligence spending. The government on Tuesday raised the country’s 2026 growth outlook to 3%, which would be the highest annual growth rate since 2021.
The rate hike was widely expected after Bank of Korea Governor Shin Hyun Song said at the bank’s May policy meeting that interest rates should be raised at an “appropriate time.” Consumer price inflation exceeded 3% in both May and June, above the bank’s 2% target, driven by the U.S. and Israel’s war with Iran, which pushed up energy costs, and by the weakness of the Korean won.
There’s also concern about rising household debt, with higher real estate prices in Seoul and surrounding metropolitan areas and a rally in technology stocks fueling borrowing.
