South Korea Raises Interest Rates for First Time Since 2023 as AI Chip Boom Drives Growth

South Korea's central bank has raised interest rates for the first time in more than three years and signalled more increases could follow, driven by an artificial intelligence-led chip boom that is fuelling sticky inflation and faster-than-expected economic growth. The Bank of Korea increased the seven-day repurchase rate by a quarter point to 2.75% on Thursday in a unanimous decision, matching the expectations of all economists surveyed by Bloomberg.

End of a Rate-Cutting Cycle

The move marks the start of a new policy cycle after officials cut borrowing costs four times since late 2024. The last rate hike before this one was in January 2023. The decision caps months of increasingly hawkish messaging from the central bank. Since leading his first policy meeting in May, Governor Shin Hyun Song has repeatedly asserted that inflation, economic growth, exchange rates and risks to financial stability all pointed in the same policy direction, minimising the trade-offs that typically complicate monetary policy decisions.

Growth and Inflation Outlook Revised Upward

In its statement, the BOK said 'the growth rate for this year is expected to considerably exceed the May forecast of 2.6%,' and it expects inflation to remain above target 'for a considerable time.' Authorities have upgraded their growth outlooks several times, with the latest revision coming earlier this week, when the government said it now expects gross domestic product to expand 3% this year. Last week, the International Monetary Fund gave South Korea the largest upward revision to its growth outlook among the world's 30 major economies, lifting its 2026 forecast to 2.6%.

Further Hikes Expected

The hike marks the start of what investors expect will be a tightening cycle that carries over into next year. Markets are already debating how quickly the central bank might move again. Shin is due to speak later Thursday morning in Seoul. 'It is judged that it will be necessary to continue a policy stance consistent with further rate hikes, and the Board will determine the timing and pace of further increases in the Base Rate while assessing the extent of inflationary pressure, the improvement trend in the domestic economy, and financial stability,' the BOK said in its statement.

For Nigerian businesses and importers, the move signals that global borrowing costs are not yet on a steady downward path. Tightening in a major Asian economy like South Korea could strengthen the dollar against emerging market currencies, including the naira, and add to imported inflation pressures if sustained.