Economists overwhelmingly anticipate the Bank of Korea will raise interest rates this Thursday, marking its first hike in over three years, with another increase expected before year-end, as inflation remains stubbornly above the central bank's 2% target.

Consumer inflation accelerated to 3.2% in June, reaching a two-and-a-half-year high and marking the fourth consecutive month above target. Inflation is projected to average around 3% in the second half of the year, paving the way for a tightening cycle.

Stronger economic growth, rising house prices, and persistently high household debt provide policymakers with room to withdraw monetary stimulus. First-quarter economic growth was the fastest in nearly six years.

Bank of Korea Governor Rhee Chang-yong has indicated that raising interest rates is necessary, as inflation is expected to exceed the central bank's target for a considerable period, particularly against the backdrop of high oil prices influenced by geopolitical tensions.

In a survey conducted from July 7 to 13, all but one of 37 economists forecast the central bank will raise its benchmark rate to 2.75% on July 16.

Bum Ki Son, an economist at Barclays, noted, "The central bank's simultaneous upward revision of its growth and inflation forecasts at the last meeting sent a relatively clear signal. The Governor explicitly stated that the bank's various mandates are not in conflict but point in the same direction of raising rates. We believe this meeting is likely the moment they follow through."

Central banks in Australia, New Zealand, Indonesia, and the Philippines have already tightened policy. A majority of economists—28 out of 31—expect one more rate hike by the end of the fourth quarter, pushing the policy rate to 3.00%. While one predicts a peak rate of 3.25%, two others foresee it holding at 2.75%.

A dot plot released in May also showed most board members expect the policy rate to reach 3% within the next six months. The median forecast suggests the Bank of Korea will raise its key rate to 3.25% by the first quarter of 2027 and maintain it at least until the end of next year, 25 basis points higher than predicted in a May survey.

This hawkish outlook reflects expectations of persistent inflation overshoot and robust economic growth. Inflation is forecast to average 2.7% this year and 2.2% next, while GDP is projected to grow 2.8% in 2026 and 2.1% in 2027.

Elevated price pressures are expected to be driven largely by high global oil prices, which have been stoked by renewed geopolitical conflict. A weakening Korean won is also adding to supply-side pressures; the currency has depreciated over 4% this year, raising the cost of imported raw materials.

A separate survey indicates the won is expected to depreciate by more than 1% further by the end of July.

Benson Wu, Korea economist at Bank of America Global Research, stated, "We expect won depreciation to be a core focus. Despite policymakers stepping up verbal intervention and coordinating messaging across ministries in recent weeks, the impact on the won appears limited."

He added, "Consequently, we will be closely watching for any signals that could open the door to consecutive rate hikes," while noting this is not the bank's base case forecast.