The Bank of Korea stayed put as scheduled, but the potential overflow of prosperity in the memory chip sector ignited expectations of rate hikes.

The Bank of Korea kept its benchmark interest rate unchanged and significantly raised its inflation and economic growth expectations. The policymakers at the central bank are weighing the price pressure brought about by the sharp increase in oil prices due to the Middle East geopolitical situation, as well as the possibility of continued high salaries for the two major storage chip giants, Samsung and SK Hynix, accelerating the prosperity of AI storage spillover. They are also assessing the uncertainty surrounding the broader economic expansion prospects. The Bank of Korea on Thursday kept the seven-day repurchase rate unchanged at 2.5%, continuing the rate pause that has been in place since July last year. The bank had conducted four rate cuts between October 2024 and May 2025. This decision aligns with the expectations of 22 out of 23 economists covered in a survey by institutions, while one economist had predicted the Bank of Korea would raise rates by 25 basis points under a backdrop of strong wage growth. As shown above - the rate pause continues, with the newly formed Bank of Korea Monetary Policy Committee remaining cautious about the economic growth outlook. The monetary policy statement shows that the Bank of Korea significantly raised its inflation expectation from 2.2% given in February to 2.7%, reflecting the continued rise in energy costs following the closure of the Strait of Hormuz due to the Iran war. The central bank also raised its economic growth outlook for 2026 from the previous expectation of 2% to 2.6%. Economists had anticipated significant increases in both these forecasts, and the new projections may fuel speculation in the market about the Bank of Korea shifting towards a hawkish rate hike stance. The meeting was the first monetary policy decision meeting chaired by the new governor, Shin Hyun-soon, and the first meeting attended by the new member, Kim Jin-yeop. Kim Jin-yeop, a former internal economist at the Federal Reserve, is generally seen as holding a more hawkish policy stance than his predecessor, Shin Chang-hwan. Governor Shin Hyun-soon is scheduled to hold a briefing for reporters later on Thursday, where he is expected to further elaborate on the monetary policy outlook, as well as the central bank's evaluation of the strength of the South Korean storage semiconductor industry and the significant expansion of salary systems related to it, as well as the assessment of the domestic housing market. The central bank will also release a statement containing details of the vote and a dot plot of the members of the Monetary Policy Committee on the future six-month interest rate trend. Cho Yong-gu, a senior fixed income strategist at Shinyoung Securities, stated, "Inflation seems to have room to rise, so the possibility of the Bank of Korea taking action in July is quite high." "The economic outlook of the Bank of Korea itself seems relatively reasonable, with no major surprises, so the focus now may shift to the dot plot of rate forecasts, any dissenting views supporting a rate hike, and qualitative comments from the governor guiding the advice." Cho added that if a rate hike proposal receives two opposing votes, the market may quickly begin pricing in expectations of a rate increase in July into the stock bond market pricing curve. "Economic growth and inflation expectations have both been significantly raised, indicating a shift in policy balance from supporting economic growth to restraining inflation. This further confirms our view that the Bank of Korea is preparing for a tightening monetary policy cycle," said economist Kwon Hyo-seong from Bloomberg Economics. The huge bonuses given by the storage chip giants have set off a new trigger for inflation: AI prosperity is rapidly spilling over, and the Bank of Korea may be forced to abandon the narrative of rate cuts. The unprecedented storage chip boom brought about by the super AI fever in South Korea is transforming from a corporate profit cycle into macro financial variables. On May 28, the Bank of Korea kept its benchmark interest rate at 2.50%, in line with mainstream expectations, but is facing renewed pressures from oil prices, the Korean won, real estate, and wage inflation. The consumer price index in South Korea rose to 2.6% year-on-year in April, higher than the 2.2% in March, while export data increased significantly by 48% year-on-year, driven by semiconductor, consumer electronics, and ship exports, showing that the South Korean economy is not a typical "demand weak stagnation" but a complex combination of "storage chip boom growth, energy and asset price-driven inflation". With the upcoming release of Anthropic's Claude Cowork and other super AI agent tools that can autonomously perform tasks in 2026, this wave of AI intelligence is rapidly sweeping the globe, with the AI computing architecture bottleneck shifting from GPUs core around matrix multiplication throughput to "AI agent-driven AI full-stack system". In this shift in the AI narrative, data center CPUs and storage chips could be the biggest winners. In other words, the AI computing bull market is expanding from the "AI GPU/ASIC chip-centric computing system" to central processors and "data storage base" in this shift. Under the backdrop of this so-called "super cycle of storage chips" driven by the unprecedented AI infrastructure frenzy, South Korea's two super storage chip giants - Samsung Electronics and SK Hynix, which together account for nearly 50% of the weight of the Kospi Composite Index, are the strongest engines attracting global funds, and also the core DRIVE that has helped South Korea's stock market reach new highs and significantly outperform global equity markets. The benchmark Kospi Composite Index in the South Korean stock market has risen by up to 100% so far in 2026, surpassing last year's leading global equity market gain of 76%. However, unlike the entire year of 2025, the 2026 rise of over 76% from the beginning of the year to now is not even six months. The dynamic of salaries at Samsung and SK Hynix could be the key trigger for the inflation chain in South Korea. Samsung's chip division has reached an agreement with the union: all chip employees can receive a cash bonus equivalent to 50% of their annual salary, with an additional 10.5% of the semiconductor business operating profit set aside as a special bonus pool, which will be distributed in the form of stocks; for example, a storage chip employee with a base annual salary of 80 million Korean won could receive a total bonus of around 626 million Korean won this year. Meanwhile, SK Hynix has already removed the bonus cap and promised to put a full 10% of the annual operating profit into a performance bonus pool over the next ten years; according to Reuters, if its operating profit reaches 25 trillion Korean won this year, employee bonuses could exceed 700 million Korean won. The macro risk is that these massive bonuses tied to operating profit will strengthen the hawkish constraints of the Bank of Korea through three channels: first, cash and sellable stocks will boost household liquidity, easily flowing into stocks and real estate rather than ordinary consumption; second, the increased purchasing power of high-income chip engineers will amplify the multiplier effect of down payments, mortgages, and asset collateralization; third, SK Hynix and Samsung's profit-sharing mechanism is becoming a benchmark in salary negotiations in the business community of South Korea, where unions at Samsung Biologics, LG U+, Kakao, and other companies have already demanded profit sharing ranging from 10% to 30%, meaning that the "AI dividend" in the semiconductor industry is likely to spread to a broader wage rigidity and service industry inflation pressure.