South Korea's central bank announced its first interest rate hike in over three years on Thursday, driven by an AI-fueled semiconductor boom that is intensifying inflationary pressures and pushing economic growth beyond expectations.

The Bank of Korea increased its seven-day repurchase rate by 25 basis points to 2.75%, aligning with economists' forecasts. This move signals the start of a new policy cycle, following four reductions in borrowing costs since late 2024. The bank's previous rate increase occurred in January 2023.

For several months, the central bank has been sending increasingly hawkish signals. Since presiding over his first policy meeting in May, Governor Shin Hyun-son has repeatedly emphasized that inflation, economic growth, exchange rate risks, and financial stability concerns all point toward the same policy direction, thereby minimizing the trade-offs that typically complicate monetary policy decisions.

The central bank stated in its announcement, "This year's economic growth rate is projected to significantly exceed the 2.6% forecast made in May," adding that it expects inflation to remain above the target level "for a considerable period of time."

At a press conference, Governor Shin stated, "In implementing monetary policy, we will continue to adjust policy until we are confident that inflation and economic growth are moving sustainably toward the target levels." He further noted that he would keep all policy options open for the next policy meeting scheduled for August 27.

This rate hike marks the beginning of a tightening cycle anticipated by investors, which is expected to continue into next year. Markets are already discussing the potential pace at which the central bank might act again.

In its statement, the Bank of Korea said, "It is judged necessary to maintain a policy stance consistent with further rate increases. The Bank will decide the timing and pace of further benchmark rate hikes while assessing the degree of inflationary pressures, the trend of improvement in the domestic economy, and financial stability."

At the press conference, Governor Shin highlighted the robust development of artificial intelligence as a primary driver of economic growth. He also indicated that the weak Korean won is expected to continue pushing inflation higher in the period ahead.