Shin Hyun-song's Monetary Policy Board raises the key rate to 2.75%, ending a 14-month freeze [Update]

[Financial News] The second meeting of the Monetary Policy Board since Shin Hyun-song took office as governor of the Bank of Korea broke a 14-month streak of holding rates steady and raised the benchmark interest rate by 0.25 percentage points. Although the Middle East crisis has eased, its impact on inflation remains, and the decision also appears to have taken into account rising housing prices, especially in the Seoul metropolitan area, as well as the won-dollar exchange rate.
At its meeting on monetary policy direction on the 16th, the Monetary Policy Board of the Bank of Korea set the benchmark rate at 2.75% per year. The rate had been kept unchanged for eight consecutive meetings since it was cut to 2.50% in May last year, but this marks a shift in direction after 14 months. The hike itself is the first since January 2023, when the rate was raised from 3.25% to 3.50%.
The tightening move was widely expected. Shin had already signaled his stance at a press briefing after the Monetary Policy Board meeting in May, saying, "Wherever you look — inflation, growth, exchange rates or real estate — the path forward is relatively clear." He repeated that message at the BOK International Conference and the bank's founding anniversary ceremony in June, as well as in a National Assembly briefing on the 9th of this month.
The market had also effectively priced in a rate hike. In a Financial News survey of 10 market experts on the 12th, all of them forecast a 25-basis-point increase in the benchmark rate. Kong Dong-rak, a researcher at Daishin Securities, said, "There is a need to curb rising inflation expectations driven by higher oil prices after the war," adding that "growth, financial stability and the exchange rate also point toward a hike."
The macroeconomic and financial environment is also creating conditions for tighter policy. Although the Middle East war has appeared to calm down on the surface and international oil prices have stabilized somewhat, inflation expectations remain elevated. In South Korea, consumer price inflation rose to 3.2% in June. There is also a need to ease upward pressure on property prices and the won-dollar exchange rate.
According to the Korea Real Estate Board (KREB), the price of all housing types in Seoul, including apartments, row houses and detached homes, rose 1.03% in June from a year earlier, up 0.13 percentage points from the previous month. It was the first time this year that the figure exceeded 1%.
The exchange rate has also fallen back into the 1,400-won range, but it is still hovering near the 1,500-won level. When 10 market experts were asked how much the rise in the won-dollar exchange rate would factor into the July Monetary Policy Board decision, the average response was 27%. Jeong Yong-taek, chief economist at IBK Investment & Securities, gave the highest estimate at 50%, followed by Baek Yoon-min at Kyobo Securities at 40%. Others put it at 10%, Park Sang-hyun of iM Securities, and 15%, Lee Jae-hyung of Yuanta Securities Korea.
The economy is also easing the burden of tightening by improving growth prospects. Expectations are growing that the 2.6% growth forecast released in May, driven by the semiconductor boom, will be revised upward. Some even expect the figure to begin with a 3. The government already estimated real GDP growth at 3.0% in its "Economic Growth Strategy for the Second Half of 2026," announced on the 14th. That is 1.0 percentage point higher than the 2.0% forecast it presented in January.
Still, borrowers with mortgage loans, credit loans and similar debt will inevitably face a heavier burden. According to data the Bank of Korea submitted to Lee Jong-wook of the People Power Party, if housing-related loan rates rise by 0.25 percentage points, the average annual interest burden per borrower would increase by 296,000 won, from 5.843 million won to 6.139 million won, based on the first quarter of this year.

taeil0808@fnnews.com Kim Tae-il Reporter