The Bank of Korea (BOK) held its benchmark interest rate steady at 2.5 percent on Thursday, 28 May, citing persistent uncertainty stemming from the Middle East conflict, while explicitly signalling that a rate hike is forthcoming as inflationary pressures mount and the Korean won continues to weaken. The decision, announced from Seoul, marks the eighth consecutive on-hold ruling even as the central bank has technically remained in an easing cycle since October 2024.

Key Developments at the BOK Meeting

The Monetary Policy Board voted 5-2 in favour of keeping the rate unchanged. The two dissenting members — Chang Yong-sung and Ryoo Sang-dai — proposed raising the rate to 2.75 percent, a signal that hawkish sentiment within the board is building. This was notably the first rate-setting meeting chaired by new BOK Governor Shin Hyun-song, who assumed office last month.

The BOK began its current easing cycle in October 2024, cutting the benchmark rate by a cumulative 100 basis points from 3.5 percent. The rate has remained unchanged since July 2025, even as external shocks have complicated the policy outlook.

What the BOK Said

In its official statement, the board cited the Middle East conflict as the primary reason for pausing. 'Given the uncertainties surrounding developments in the Middle East and that their spillover effects remain high, the Board judged that it would be appropriate to maintain the current level of the base rate while assessing developments in the conflict and their impacts on growth and inflation,' the BOK said.

However, the central bank made clear that the pause is temporary. 'The board will decide the timing of any rate hikes while assessing the extent of the increase in inflationary pressure, the improvement trend in the domestic economy and financial stability,' it added.

Governor Shin's Hawkish Stance

Governor Shin Hyun-song reinforced the tightening signal at a post-meeting press conference. 'It is necessary to raise the base rate at an appropriate time,' he said, pointing to high inflation, steady economic growth, and foreign exchange volatility as the three drivers of that assessment. 'We will determine the timing and pace of interest rate hikes based on incoming data, while assessing the extent of inflationary pressures, the trend of economic recovery, and financial stability,' he added.

On the currency front, Shin warned of 'no tolerance for one-sided FX movements,' signalling that authorities are prepared to intervene decisively if the won's slide accelerates. The Korean won has been hovering near the psychologically significant level of 1,500 won per US dollar in recent months, weighed down by the ongoing US-Iran war.

Revised Growth and Inflation Forecasts

The BOK revised its 2026 economic growth forecast upward by 0.6 percentage points to 2.6 percent, driven by robust semiconductor exports. Governor Shin said exports are expected to contribute 0.7 percentage points to growth this year, with fiscal support adding 0.2 percentage points and a rally in the local stock market contributing 0.1 percentage points.

At the same time, the central bank raised its inflation forecast sharply — from 2.2 percent to 2.7 percent — attributing the revision to higher international oil prices linked to the US-Iran war. Rising commodity prices and supply constraints from the protracted conflict are testing the resilience of Asia's fourth-largest economy, even as semiconductor demand provides a meaningful offset.

What Comes Next

With two board members already voting for a hike and the governor publicly backing tightening, the direction of travel for South Korean monetary policy appears increasingly clear. Markets will be watching incoming inflation and growth data closely, along with any further escalation in the Middle East that could complicate the BOK's timeline. The supplementary budget and semiconductor export trajectory are the two domestic variables most likely to determine when the first hike arrives.