The Bank of Korea has shifted to a tightening stance following a rate hike last month, raising interest in the possibility of back-to-back rate increases. With the second quarter economic growth rate exceeding expectations and domestic recovery continuing, inflation and household debt are also contributing to pressure for further rate hikes.
According to financial sources on August 13, the market initially anticipated that the Bank of Korea would pause after raising rates in July and consider another hike around October. However, recent comments from Bank of Korea Vice Governor Yoo Sang-dae, stating that "the likelihood of an additional hike is high unless there is a significant shock," have renewed speculation about consecutive increases at this month's monetary policy committee meeting.
One key variable in the August rate decision will be the revised economic outlook to be announced this month. As the economic performance this year has significantly outpaced initial forecasts, there is a growing possibility of an upward revision to the growth rate. Previously, the Bank of Korea projected a growth rate of 2.6% for this year in May, and there are expectations that this forecast may be raised again.
In fact, the country's gross domestic product (GDP) grew by 0.6% in the second quarter compared to the previous quarter, far exceeding the Bank of Korea's forecast of 0.2%. Strong domestic demand and robust exports, particularly in semiconductors, have continued the growth trend following a 1.8% increase in the first quarter. The growth rate for the first half of the year stands at 3.8%, the highest level recorded in four and a half years since the second half of 2021 (4.5%).
As the South Korean economy continues to surprise with its growth in the second quarter, major international investment banks have also raised their growth forecasts for the year. At the end of July, eight major investment banks projected an average real GDP growth rate of 3.2% for South Korea, up 0.2 percentage points from the end of June (3.0%). These banks have revised their growth forecasts upward for four consecutive months since April (2.4%).
Domestic consumption trends are also improving. Credit card usage, a key indicator of domestic consumption, increased by about 20% in June compared to the previous month, combining both individual and corporate spending. In July, consumer spending likely improved further due to vacation season expenditures.
However, the ongoing increase in household debt is another factor the Bank of Korea is considering. Despite stringent lending restrictions from banks, household loans, particularly mortgage loans, appear to have continued to rise in July. Earlier, Bank of Korea Governor Jin Hyun-sung noted that "the high volatility in financial and foreign exchange markets, along with the renewed rise in housing prices in the metropolitan area, poses risks of financial imbalances."
Inflationary pressures are also increasing the need for further rate hikes. Vice Governor Yoo recently stated, "We need to consider the Bank of Korea's growth outlook and inflation trajectory going forward." The core consumer price index for July was 116.43, reflecting a 2.3% increase compared to the same month last year, marking the highest growth rate since December 2023. If supply-side factors such as international oil prices and exchange rates, along with domestic demand pressures, continue to rise, this could provide justification for additional tightening.
Some analysts in the securities industry are also raising the likelihood of a rate hike in August. Jo Yong-gu, a researcher at Shin Young Securities, stated, "Given the second quarter GDP and GDI, as well as the July consumer price index, the conditions for back-to-back hikes are in place. While headline and living costs have slowed, the rise in core prices is a material concern that could indicate upward pressure from chip inflation and demand."
* This article has been translated by AI.
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