The Bank of Korea holds rates steady but raises inflation expectations; two board members call for a rate hike.

The Bank of Korea kept interest rates unchanged but simultaneously sharply raised its inflation and growth forecasts—a combination that sends a clear hawkish signal, prompting markets to bet on a rate hike as early as July.

On May 28, the Bank of Korea announced that it would keep the seven-day repo rate at 2.50% unchanged, continuing the policy pause that began last July. This marks the eighth consecutive meeting with no change.

However, this meeting was far from calm. The Bank of Korea revealed that the decision was not unanimous—two of the seven members voted in favor of a rate hike. This rare internal division has directly fueled market expectations of a policy shift.

Meanwhile, the central bank significantly raised its economic forecasts: inflation for 2026 was raised from 2.2% to 2.7%, and growth from 2.0% to 2.6%. The Bank stated it "will implement policies to keep inflation stable at target levels," and emphasized the "need to pay attention to sharp fluctuations in the exchange rate."

Why the sudden hawkishness? Strength in both inflation and exports

The core logic driving the central bank's shift is the simultaneous upside surprise in inflation and economic growth.

On inflation, South Korea's consumer inflation rate rose to 2.6% in April, the highest in 21 months, up from 2.2% in March. The closure of the Hormuz Strait due to the Iran conflict has pushed up energy costs, making it the main driver behind the recent acceleration in inflation.

On growth, South Korean exports have performed strongly. Exports in April surged by 48% year-on-year, while March's growth was revised to 50%, driven by a surge in semiconductor shipments, benefiting from global tech companies’ massive buildout of AI infrastructure and the resulting demand.

Strong trends in both areas mean the central bank’s previous logic of “supporting growth with loosening” no longer holds. Cho Yong-gu, fixed income strategist at NH Investment & Securities, said: “Inflation appears to have further upside potential. The likelihood of action by the Bank of Korea in July is quite high.”

Two dissenting votes, market focuses on the “dot plot”

The two votes in favor of a rate hike are the market’s most closely watched detail from this meeting.

Cho Yong-gu pointed out, “With two dissenting votes in favor of a hike, the market is likely to quickly start pricing in a rate hike in July.”

There are two notable backgrounds to this meeting: First, new Governor Shin Hyun Song chaired his first monetary policy meeting since taking office; second, new member Kim Jinill participated in decision-making for the first time—Kim previously served as a Fed economist and is generally viewed by the market as more hawkish than his predecessor.

The Bank of Korea also released its interest rate “dot plot,” showing the forecasts of committee members for rate trends over the next six months. The dot plot, together with the governor’s statements at the press conference, has become a key reference for interpreting the policy path.

Heat rises on rate hike expectations, Citi forecasts four hikes

Market expectations for the rate hike path are converging quickly.

Citi economist Jin-Wook Kim forecasts that the Bank of Korea will raise rates once each in July and October 2026, and in January and April 2027, for a total of four hikes.

HSBC economist Jin Choi said ahead of the decision: “Upside risks to growth and inflation have increased, and the committee may signal stronger readiness to tighten, while continuing to emphasize conditionality and data dependence.”

Bloomberg cited economist Hyosung Kwon, saying: “Significant upward revisions to growth and inflation forecasts mean policy priorities have shifted from supporting growth to controlling inflation. This strengthens our view that the Bank of Korea is laying the groundwork for a tightening cycle.”

The won reacted mildly; after the announcement, the Korean won fell about 0.3% against the US dollar, basically in line with its intraday movement.

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