Korean Won Rises for Second Straight Day on BOK Rate Hike

During Asian trading hours on Thursday, the Korean won continued to strengthen against the US dollar, with the USD/KRW pair trading around 1381.61645, down about 0.3% on the day. This marks the second consecutive trading day of gains for the won following the Bank of Korea's rate hike, with the exchange rate approaching the 11-month low previously set.

**Multiple Supports Behind the Rate Hike Decision**

The Bank of Korea's consecutive rate hikes are underpinned by three considerations: economic growth, inflationary pressures, and financial stability. Driven by the AI construction boom, South Korea's semiconductor exports have been robust, with June exports surging 70.7% year-on-year—the largest increase in nearly 50 years—providing key momentum for the 1.8% quarter-on-quarter GDP growth in the first quarter. The solid economic fundamentals have given the central bank room to tighten monetary policy.

Meanwhile, inflationary pressures remain persistently high. Data shows South Korea's June consumer price index rose 3.2% year-on-year, exceeding 3% for two consecutive months, while core inflation has climbed to 2.5% from levels at the start of the year. The Bank of Korea noted that underlying inflationary pressures may be greater and more persistent than previously expected, requiring a monetary policy stance consistent with further rate hikes.

**Financial Stability Risks and the Global Tightening Wave**

Financial stability risks stemming from rising housing prices and surging household debt are another key factor driving the rate hike. According to market reports, household loans in South Korea are growing at a pace of 8 trillion to 9 trillion won per month, with accelerating home prices in Seoul and surrounding areas forcing the central bank to focus on asset price bubble risks.

The Bank of Korea's action also aligns with the tightening pace of major global central banks. Recently, the European Central Bank and the Bank of Japan have announced rate hikes, with a wave of global liquidity tightening taking shape. Capital Economics analyst Gareth Leather believes that given rising core inflation and strong export performance, the Bank of Korea may still raise rates further in the future. HSBC economists expect another 25-basis-point hike in the fourth quarter following this round of increases.