Will Interest Rates Rise Above 3% Again? Experts Split on August Decision

Market expectations are divided ahead of the Bank of Korea's decision on the base rate for August. While a slight majority believe that an additional hike is necessary due to stronger-than-expected growth and high core inflation, the prospect of a back-to-back increase within just a month raises concerns about the burden on household interest payments.

According to financial sources on the 23rd, the Bank of Korea will hold its sixth Monetary Policy Committee meeting of the year on the 27th to decide whether to adjust the current base rate of 2.75% per annum.

In a survey conducted by Aju Economy involving seven major bond and macroeconomic experts, four respondents (57.1%) expect the Bank to raise the base rate by 25 basis points (1 basis point = 0.01 percentage points) to 3.00%. The remaining three (42.9%) predict that the rate will be held steady. Among those predicting a hike, only one expert anticipated a unanimous decision, while three expected at least one dissenting opinion.

The close split between forecasts for a hike and a hold reflects the tension between the need for additional tightening due to growth and inflation, and the significant financial burden that consecutive rate increases could impose. Notably, the growth driven by strong semiconductor exports and persistent core inflation are expected to be key factors in the rate decision at this meeting.

Experts predicting a rate hike cite high inflation levels and the potential for upward revisions to growth forecasts as their main reasons. An Jae-kyun, a researcher at Korea Investment & Securities, stated, "Despite high external uncertainties, the expected growth rate is projected to exceed 3% annually, and the inflation outlook is expected to remain in the mid-2% range, which are the most critical factors for monetary policy decisions."

Conversely, Ahn Ye-ha, a researcher at Kiwoom Securities, forecasts a hold, arguing, "The upward revision of the growth forecast has already been anticipated and was reflected in the July rate hike. If additional upward pressure on inflation is confirmed, rates could rise further, but considering the recent decline in exchange rates, I believe a consecutive hike is not warranted at this time."

If the Bank raises rates by 25 basis points again, the base rate will reach 3.00%, marking a return to the 3% range for the first time in about a year and a half since it fell to the 2% range on February 25, 2025. Experts generally expect the final rate level in this tightening cycle to be around 3.25%.

The concern lies with the interest burden on households and businesses. As of the first quarter of this year, the household debt ratio compared to nominal GDP stands at 85.3%. If consecutive hikes materialize, rising loan rates could increase repayment burdens, particularly for vulnerable borrowers. Businesses will also face rising funding costs due to increases in both the base and market interest rates. Small and medium-sized enterprises, as well as those with lower credit ratings, are expected to bear a relatively heavier burden.

Woo Hye-young, a researcher at LS Securities, noted, "While deleveraging household debt is important, raising rates too quickly could exacerbate the burden on borrowers, especially the vulnerable. The Bank of Korea may feel pressure to proceed with gradual rate increases."

Park Sang-hyun, a researcher at iM Securities, emphasized, "With both the U.S. and Japan experiencing sharp rises in government bond yields, if domestic rates are also pressured to rise, market interest rates could increase further. However, even if the base rate is raised this time, expectations may form that future hikes will be limited to one or two more, suggesting that while government bond yields may rise, they are nearing their upper limits."