The semiconductor boom exacerbates inflation risks as the Bank of Korea unusually raises interest rates twice in a row.

The Bank of Korea has raised its benchmark interest rate for the second consecutive time to address inflation risks triggered by the unprecedented prosperity of the semiconductor industry, which has driven the economy to exceed expectations. The Korean won saw a slight increase, continuing its upward trend from before the rate decision was announced. On Thursday, South Korea voted 6 to 1 to raise the seven-day repurchase rate by 25 basis points to 3%, with the sole dissenting member advocating for inaction. A prior survey of 22 economists indicated that 14 expected a rate hike of 25 basis points, while 8 anticipated no change in rates. The Bank of Korea had previously raised rates by 25 basis points in July, marking the first increase since January 2023. The Bank of Korea Raresly Implements Back-to-Back Rate Hikes The Bank of Korea rarely raises borrowing costs consecutively. The last time this occurred was in early 2023. Before that, the central bank had carried out back-to-back rate hikes in the summer of 2007 and the winter of 2021-2022. AI Infrastructure Boom Ignites Semiconductor Prosperity, Bank of Korea Significantly Raises Economic Growth Projections As the Bank of Korea announced its latest rate decision, South Koreas export-oriented economy was thriving, largely attributed to the global AI infrastructure boom that has driven robust demand for semiconductors. In addition to tightening monetary policy, the Bank of Korea also significantly raised its economic growth forecast for this year and next, expecting GDP to grow by 3.3% this year, a substantial increase from the previous estimate of 2.6%; by 2027, GDP is projected to grow by 2.9%. Nomura Holdings economist Jeong-Woo Park stated, Given the economic growth forecast of 2.9% for next year, the Bank of Korea has no reason to hesitate. They are likely to be more optimistic about domestic consumption and the construction industry next year. Government fiscal spending is also inclined to support the construction sector, and the Bank of Korea governor has indicated that higher gross national income will drive consumption. Park had previously expected the Bank of Korea to raise rates by 25 basis points on Thursday. Economist Hyosung Kwon commented, The rate hike aims to curb the spillover effects of income growth on demand-driven inflation and to mitigate financial imbalances. We still expect the policy rate to reach 3.5% in the first half of 2027. Dot Plot Suggests Rate Hike Cycle is Not Over; Inflation Remains Core Variable of Monetary Policy The Bank of Korea also released its first updated dot plot since May, showing committee members predictions for the benchmark interest rate six months out. It is reported that all seven members of the monetary policy committee, including Governor Lee Chang-yong, submitted their rate forecasts anonymously. Each member provided three points for the baseline scenario, rising scenario, and declining scenario, totaling 21 points. The latest dot plot indicates that 10 out of the 21 points are concentrated at 3.25%, suggesting potential further rate hikes. Latest Forward Guidance The Bank of Korea committee stated in a release that it expects inflation rates to remain above target levels for a considerable time and will continue to implement policies to align the pace of price increases with the target. The Bank of Korea still projects this year's consumer inflation rate to be 2.7%, and 2.3% for 2027. Following the announcement of the decision, the won rose to 1,377.40 won per dollar at one point. Since the July meeting, the won has broken past the 1,400 mark against the dollar, having previously hit 1,562 in June, the lowest level in 17 years. The won has recently bounced back, but the Bank of Korea still decided to raise rates again, underscoring its determination to combat inflation risks. Recent economic data also supports the Bank of Koreas decision to raise rates. In the second quarter, South Koreas economy grew by 0.6% quarter-on-quarter, far exceeding the Bank of Koreas May forecast of 0.2%. Compared to the same period last year, the economy grew by 3.7%. Over the past year, the inflation rate has remained at or above the Bank of Korea's target level of 2%. In July, the year-on-year growth rate of consumer prices slowed from 3.2% in June to 2.8%, but underlying price pressures remain, with the core inflation rate, excluding food and energy, at 2.6%. Bank of Korea Governor Shin Hyun-song stated at the post-meeting press conference that the thriving chip industry and improving incomes will support economic growth. He also remarked that inflation is the most significant factor in interest rate decisions.