SEOUL, July 16 (Xinhua) -- South Korea's central bank raised its policy rate by 25 basis points on Thursday, turning toward monetary tightening in about three and a half years amid stubborn inflation, solid economic growth, massive household debt and high exchange rate volatility.
Bank of Korea (BOK) Governor Shin Hyun-song and other monetary policymakers decided to increase the benchmark seven-day repurchase rate to 2.75 percent from 2.50 percent.
All seven monetary policy board members unanimously supported the rate hike decision.
The rate increase marked the BOK's first shift back toward the monetary tightening since January 2023.
It was in line with market expectations. According to the Korea Financial Investment Association's poll of 100 fixed-income experts, 66 percent predicted the rate hike this month.
The central bank cut its key rate by a quarter percentage point in October and November of 2024 and in February and May of 2025, before making a rate freeze decision for an eighth consecutive time through May this year.
The BOK's shift of monetary policy stance from easing to tightening was driven by an ongoing inflationary pressure, robust economic growth, growing household debt and a high South Korean won versus U.S. dollar exchange rate.
The BOK said in a statement that it will be necessary to continue a policy stance consistent with further rate hikes, indicating additional rate increases later this year.
The bank explained that it will determine the timing and pace of further increases in the policy rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy and financial stability.
Inflationary pressure intensified amid the renewed Middle East conflicts. The consumer price index (CPI) shot up 3.2 percent in June from a year earlier, marking the fastest gain in two and a half years since December 2023.
The headline inflation stayed above the central bank's mid-term inflation target of 2 percent for 10 straight months since September 2025.
Oil products' price spiked 24.7 percent last month, raising the overall inflation by 0.93 percentage points. It was the fastest in about four years since July 2022.
Backed by the artificial intelligence (AI) boom, the semiconductor export-led economic growth provided the central bank with economic cushion to absorb the impact of monetary tightening.
The outbound shipment, which accounts for about half of the export-driven economy, jumped 70.9 percent from a year earlier to 102.25 billion U.S. dollars in June, topping 100 billion dollars for the first time in the country's history.
Semiconductor export skyrocketed 199.5 percent to hit an all-time high of 44.82 billion dollars, surpassing 40 billion dollars for the first time.
The country's revised real gross domestic product (GDP), adjusted for inflation, spiked 1.8 percent in the first quarter from the previous quarter, marking the fastest increase in five and a half years since the third quarter of 2020.
The finance ministry significantly raised its real GDP growth outlook for 2026 by 1.0 percentage point to 3.0 percent amid an unprecedented semiconductor export boom.
The BOK also expected this year's growth rate to considerably exceed the bank's May forecast of 2.6 percent.
Spiraling home prices in the Seoul metropolitan area alongside a sharp rise in debt-fueled stock investments drove the BOK to tighten its monetary policy stance.
Debt owed by households to deposit-taking banks totaled 1,189.4 trillion won (796.2 billion U.S. dollars) at the end of June, up 7.6 trillion won (5.1 billion dollars) from a month earlier.
The June growth was faster than an expansion of 6.9 trillion won (4.6 billion dollars) in the previous month, keeping an upward trend for a fourth successive month.
The domestic real estate market fluctuated in recent months, with the number of apartment transactions across the country reaching 48,000 in January, 41,000 in February, 49,000 in March, 49,000 in April and 49,000 in May.
Volatility remained in the won-versus-dollar exchange rate, which continued to hover around the1,500-won level.
The exchange rate was expected to face downward pressure with the BOK's rate increase as the U.S. Federal Reserve froze its target range for the federal funds rate at 3.50-3.75 percent in June.
The high exchange rate was feared to drive up import costs and spark additional inflationary loops. ■