Monetary Policy Board opts for back-to-back hike, raises base rate to 3.00% [Update]

[Financial News] The Monetary Policy Board of the Bank of Korea chose to raise the base rate for a second straight meeting. Although the situation in the Middle East has eased for now, the move appears aimed at containing the lingering impact on prices, cooling the rise in home prices centered in the Capital Region, and firmly stabilizing the won–dollar exchange rate.
At its meeting on monetary policy direction on the 27th, the Monetary Policy Board set the base rate at 3.00% a year. The rate had been held unchanged at 2.50% since it was cut in May last year, through eight consecutive meetings until May this year, but the board changed course in July, 14 months later. That increase itself came for the first time in three years and six months since January 2023, when the rate was raised from 3.50% to 3.75%.
With this latest move, the base rate has returned to the 3.00% range for the first time since January last year.
The July tightening had, in fact, been widely expected. Starting with Governor Shin's remark at a May press briefing after a Monetary Policy Board meeting that "the path is relatively clear no matter where you look — prices, growth, exchange rates or real estate," he made the same stance clear again at the BOK International Conference in June, the bank's founding anniversary ceremony, and a July 9 report to the National Assembly.
This time, however, another tightening was far from certain. After the July meeting, Shin made no further public comments, and views in the market were divided. Those arguing for a back-to-back hike in August said accumulated high inflation remained the board's main concern and that waiting until October could mean missing the right timing. They also pointed to growth supported by semiconductor-led exports.
On the other hand, some argued that the won–dollar exchange rate had already eased to the 1,300-won range and that prices and home values were not in such an urgent state as to require consecutive tightening. Concerns were also raised that the burden on households with debt could increase.
Still, the board appears to have given more weight to the former view this time. The macroeconomic and financial environment is also creating conditions for tightening. International oil prices have stabilized somewhat as the Arab-Israeli conflict has eased, but inflation expectations remain elevated. Consumer price inflation slowed to 2.8% in July, but the BOK believes the accumulated price pressures have not yet been resolved.
The exchange rate has also fallen back into the 1,300-won range, but there is still room for it to rebound. If exporters' demand to convert earnings into won dries up, or if the Federal Reserve System (Fed) unexpectedly raises its base rate, the exchange rate could move higher.
The economy is easing the burden of tightening by improving its growth outlook. The economic growth rate forecast released that day for this year stood at 3.3%. That is up by 1.5 percentage points from the November forecast of 1.8%, 1.3 percentage points from the February forecast of 2.0%, and 0.7 percentage points from the May forecast of 2.6%.

[email protected] Kim Tae-il Reporter