Bank of Korea Signals Further Rate Hikes as Inflation Pressures Persist

South Korea's central bank is poised to raise interest rates further to combat ongoing inflationary pressures, according to the outgoing senior deputy governor. Speaking at a press conference on Tuesday, Bank of Korea (BOK) Senior Deputy Governor Ryoo Sang-dai stated that the likelihood of an additional rate hike is high, barring any extraordinary economic shock.

Ryoo, whose three-year term concludes on August 20, emphasized that the central bank's policy is conducted pre-emptively. He noted that further tightening would be considered in light of the current growth and inflation outlook. This follows the BOK's first rate increase in 3-1/2 years last month, a move that signaled the start of a tightening cycle as robust growth in Asia's fourth-largest economy stoked inflation concerns.

The central bank is particularly focused on demand-driven inflation rather than supply-side disruptions, such as those stemming from the Middle East conflict. Ryoo explained that the domestic economic recovery is expected to generate gradual but persistent upward price pressure. He indicated that if he were to attend the upcoming August 27 policy meeting, he would closely examine export and credit card spending data to inform the decision.

While recent currency gains and stock market volatility warrant discussion among board members, Ryoo suggested these are not primary drivers of policy decisions. He noted that the won's exchange rate, currently near 10-month highs, remains "very high" in the 1,400 won-per-dollar range and continues to exert significant upward pressure on inflation. Although the broader trend points to further declines in the dollar-won rate, he cautioned that a rapid fall is unlikely due to temporary factors.

Recent data showed inflation softened to a three-month low in July, undershooting expectations due to falling oil prices. However, policymakers remain wary of upward pressures, and markets have not ruled out a possible back-to-back rate hike this month. The trade-reliant economy has also outperformed forecasts in the second quarter, fueled by soaring chip exports amid the global AI boom. Ryoo stopped short of specifying the pace or extent of any further increases.