The Bank of Korea raised its policy rate by 25 basis points to 3% in its second consecutive increase. The increase followed a 25 basis point hike in July, the bank's first increase in three and a half years. Core inflation reached 2.6% in July, the highest since December 2023. Core inflation excludes volatile food and energy prices. Consumer price inflation eased to 2.8% in July. Bank of Korea policymakers had flagged further tightening in July. The bank said consumer prices would remain above its 2% target for a considerable time. Seoul apartment transaction prices rose 2.50% in June from May, the steepest monthly gain since June 2021. The bank said Korea's role in the global artificial intelligence value chain should support exports and investment. The bank expected exports and investment to grow strongly. The bank said higher semiconductor prices were likely to support domestic demand through higher corporate profits, increased investment, wage gains, and tax revenue. The central bank cut its benchmark rate by 1 percentage point between October 2024 and May 2025. It then held the rate at 2.5%. Thursday's increase returned borrowing costs to their level before the February 2025 cut. Eighteen of 35 economists surveyed by Reuters expected the increase. The Bank of Korea said it would assess inflationary pressure, domestic economic improvement, and financial stability when determining the timing and pace of further increases. The KOSPI lost 22% in July, its worst month since 2008. The won later rallied below 1,400 per dollar in August. Leveraged chip funds lost close to $1 billion this month. That was their first outflow since their launch in late May. South Korean retail capital rotates between equities, structured products, and digital assets. The effect of a 3% policy rate on that rotation should become clearer once September flows settle.
Bank of Korea Raises Policy Rate to 3% in Second Consecutive Hike
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Summary
The Bank of Korea raised its policy rate to 3% in its second consecutive hike, following a 25 basis point increase in July. The central bank cited ongoing inflationary pressures and said core inflation hit 2.6% in July, the highest since December 2023. It also warned that consumer prices will stay above its 2% target for a long time. Regulatory policy remains tight as the bank continues to counter inflation. CFT measures are also being reinforced to ensure financial stability amid the tightening cycle.
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