BOK delivers back-to-back rate hikes, remains hawkish

By Cynthia Kim and Jihoon Lee

SEOUL, ‌Aug 27 (Reuters) - The ​Bank of ​Korea on Thursday raised its benchmark interest rate by a quarter percentage point to 3.00%, as expected, delivering a second straight increase as inflation stays above target and financial ‌stability risks persist.

The seven-member monetary policy board at the BOK voted to raise the ⁠seven-day repurchase rate to the highest level since February 2025, a decision predicted by 18 of 35 economists surveyed in ‌a Reuters poll.

The BOK also revised ‌up this year's growth estimate to 3.3% from the 2.6% projected in July. It left this year's inflation forecast unchanged at 2.7%.

The median expectation is now for one more rate hike in the ​first quarter of 2027 and then a hold through to at least the end of next year, as analysts expect policymakers to put more emphasis on managing financial stability amid an overheating housing ⁠market while strong growth feeds into underlying inflation.

"The economy is strong enough to absorb today’s increase, but the case for further hikes is ​less clear," Gareth Leather, an economist at Capital Economics wrote after the rate decision.

"With the currency strengthening, inflation easing and domestic demand still weak, we think ​the BOK will be under less pressure to raise rates ‌further, despite the economy’s strong headline growth."

The BOK's hawkish hike to 3.00% aligns with a global central bank environment marked by severe division, with the Federal Reserve ⁠maintaining restrictive rates and the Bank of Japan taking a cautious approach to a fragile recovery.

The BOK is fighting domestic inflationary pressures and a hot housing market, just as geopolitical tensions threaten to push global import costs higher.

Investors ⁠in the coming weeks will be focused on Chinese and U.S. demand indicators and emerging inflation data to determine if ​the BOK's extended tightening cycle becomes the global norm.

Local bond markets had already priced in much of Thursday's move, and yields reflect a market bracing for a longer tightening campaign.

South Korea's policy-sensitive treasury bond futures traded down 0.03 points ‌to 103.29 as of 0149 GMT, erasing earlier losses of 0.28 points after the central bank's forward guidance.

In the updated six-month dot plot, refreshed for the ‌first time since May, a policy rate of 3.25% emerged as the most probable outcome for end-2026, with 10 ⁠of the 21 dots clustered at that ‌level. Six dots pointed toward a ​higher peak of 3.50%. The remaining five dots favored holding steady at 3.00%.

Governor Shin Hyun-song will hold a news conference at 0210 GMT.

(Reporting by Cynthia Kim; Editing by ‌Sam Holmes)

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