The Bank of Korea has raised its benchmark interest rate by 0.25 percentage points to 2.75% as a response to inflationary pressures and the recent conflict in the Middle East. This is the first rate increase in over three years and comes under the leadership of new governor Shin Hyun-song. The Korean won has weakened significantly, affecting economic stability, despite strong economic growth and a record current account surplus. Following the announcement, South Korea's Kospi stock index dropped nearly 7%. Economists anticipate further rate hikes in the future as inflation remains above the Bank's target.

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South Korea stocks slump after first rate rise in 3 years

Bank of Korea’s first move under Shin Hyun-song comes amid concern over won weakness and reliance on energy imports

Bank of Korea governor Shin Hyun-song has said that the memory chip boom was feeding through to stronger household spending, wage growth and investment, increasing inflationary pressures© Yonhap/EPA/Shutterstock

Song Jung-a in Seoul

PublishedJuly 16 2026

UpdatedJuly 16 2026

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Korea’s central bank has raised its benchmark interest rate by 0.25 percentage points to 2.75 per cent, kicking off a monetary tightening cycle aimed at containing inflationary pressures amid renewed conflict in the Middle East.

The move announced on Thursday was the Bank of Korea’s first rate increase in more than three years, as well as its first move under governor Shin Hyun-song, a renowned international economist who took over leadership of the central bank in April.

Before Thursday’s move, the BoK had held rates at 2.5 per cent since May 2025.

In recent months, the Korean won has weakened to its lowest level against the US dollar since the 2008 global financial crisis. The country’s reliance on imported energy has also raised concerns as the conflict in the Middle East has roiled global energy markets.

The Kospi stock index fell almost 7 per cent following the announcement on Thursday. The won strengthened slightly to Won1,486 to the dollar.

Shin has stressed the need for tighter monetary policy, pointing to the country’s robust economic recovery on the one hand and the persistent weakness in the won, inflation that is running well above the BoK’s target and growing financial imbalances on the other.

The central bank has said the economy is continuing to benefit from the artificial intelligence-driven semiconductor boom, although inflation is expected to remain above its 2 per cent target.

Exports surged 70.9 per cent in June from a year earlier, the fastest growth rate in nearly half a century, driven by soaring demand for semiconductors. Korea posted its strongest growth last quarter in nearly six years, helped by strong chip exports.

The government this week upgraded its economic growth forecast for 2026 to 3 per cent from 2 per cent, exceeding the IMF’s 2.6 per cent projection last week. Officials said the memory chip boom should continue to offset the economic effects of the Middle East conflict.

Despite South Korea’s record current account surplus, the won has remained under pressure, declining more than four per cent against the dollar this year and ranking among Asia’s worst-performing currencies.

The weaker won has pushed up import costs. Analysts blame the currency’s weakness on exporters retaining overseas earnings for reinvestment and overseas equity purchases by Korean institutional and retail investors.

Consumer inflation has gathered pace, rising 3.2 per cent in June from a year earlier, its fastest rate since December 2023. Surging housing prices in Seoul and surrounding areas, coupled with high household debt, are also a concern for Korean authorities.

Shin has said that the semiconductor export boom was feeding through to stronger household spending, wage growth and investment, increasing the risk that inflation would remain elevated for a considerable period.

The central bank has also highlighted sizeable bonus payments at leading chipmakers Samsung Electronics and SK Hynix, which it said could contribute to broader wage gains and stronger consumer demand.

South Korea’s move joined other Asia-Pacific countries including Japan, Australia, New Zealand, Indonesia and the Philippines in tightening policy in recent months.

Economists expect the BoK to deliver another 0.25 percentage-point rise in October, followed by two increases next year, which would lift interest rates to 3.5 per cent by the first half of 2027.

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