New BOK chief signals coming rate hikes as inflation pressure builds

South Korea's central bank on Thursday kept its benchmark interest rate unchanged, raising its growth forecast for 2026 to 2.6 percent and signaling a pivot toward tighter monetary policy as early as July.

The Monetary Policy Board held the key rate steady at 2.5 percent, extending the rate freeze that had been in place since May 2025. However, hawkish signals became more pronounced, with two of the seven board members calling for a 25-basis-point rate hike.

"Whether looking at inflation, growth, the exchange rate or the property market, the direction is clear," Bank of Korea Gov. Shin Hyun-song said at a press conference at the central bank shortly after the rate-setting decision. The meeting was Shin's first since taking office in late April.

"Raising the base rate would provide an opportunity to handle them all at once," Shin said.

He added that the key questions are when to raise it, how quickly to do so, and how far the rate should ultimately go, making it clear that the central bank is preparing to enter a rate-hike cycle.

Inflationary pressure is the foremost factor driving the central bank to consider a rate hike. Rising oil prices stemming from the Middle East conflict are directly pushing up consumer inflation. Consumer prices rose 2.6 percent from a year earlier in April, sharply accelerating from 2.2 percent in March.

"Looking at broader indicators, inflationary pressure remains fairly strong, and we expect inflation to peak sometime in the second half of the year," he said.

An improved economy also lays the groundwork for the BOK to raise rates. The central bank on Thursday lifted its growth forecast for the Korean economy in 2026 to 2.6 percent from the 2 percent projected in February, citing robust semiconductor exports.

Shin projected the chip boom to continue as output cannot ramp up significantly in a short period of time, adding that the sector is expected to contribute 0.7 percentage point to GDP growth.

If the war in the Middle East is resolved, growth could come in above 2.6 percent, he added.

The Korean won's prolonged weakness against the dollar further adds pressure on the central bank, as a softer currency can fuel broader inflationary pressure by driving up import costs.

In recent sessions, the won has traded above the 1,500-per-dollar level, revisiting levels seen during past financial crises. On May 22, the won was quoted at 1,517.2 per dollar at close, surpassing the 1,150 level for the first time since April 2. During trading, it hit as low as 1,519.4 per dollar, nearing the 1,520 mark.

"We will not tolerate one-sided moves in the currency market," Shin said, adding the central bank has "the tools, the will and the means to act."

Market analysts projected the BOK to lift its base rate in July, as it does not hold a rate-setting meeting in June.

"We expect the central bank to raise the rate by 25 basis points at its July monetary policy meeting and maintain the forecast for two rate hikes in the second half of the year. The pace of the tightening cycle could also accelerate more quickly than expected,” Kim Chan-hee, an analyst at Shinhan Securities, said.

"The central bank's upward revision to growth and inflation forecasts signals improving macro fundamentals and a clear shift that the easing cycle has concluded," Ben Luk, senior multi asset strategist at State Street Market, said, projecting one to two rate hikes in the second half of this year.