Bank of Korea raises rates for first time in 3 years amid AI inflation fears

Federal Reserve Chair Kevin Warsh and the Bank of Korea delivered sharply divergent messages this week on whether the artificial intelligence investment boom will fuel inflation, highlighting a growing rift among the world's central banks over how to respond to the technology's economic effects.

Warsh Downplays AI Price Pressures

During his first congressional testimony as Fed chair, Warsh told the Senate Banking Committee on Wednesday that the massive spending on AI infrastructure need not trigger lasting inflation. "I don't view a one-time change in prices as necessarily being inflationary, because I think there's a supply response," he said. The comment came amid two days of hearings in which Warsh pledged a "regime change" at the Fed to defeat inflation, vowing that the price surge of the past five years "will be a thing of the past".cnbc+3

Warsh has previously argued that AI will reduce costs across the economy and lift productivity over time. His optimism puts him at odds with some of his own colleagues: New York Fed President John Williams said earlier this month that AI-driven demand is now his primary inflation concern and could force rate increases.linkedin+1

Bank of Korea Moves in the Opposite Direction

Hours after Warsh's Senate appearance, the Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75% on Thursday — its first hike since January 2023. The move reflects consumer price growth that hit 3.1% in May, well above the BOK's 2% target. Governor Shin Hyun-song had signaled the decision in advance, telling parliament that stronger growth, above-target inflation, and financial stability risks necessitated tighter policy.chosun+3

Bloomberg reported in June that the BOK warned AI-driven semiconductor windfalls in South Korea may stoke broader inflation pressures, a concern that runs directly counter to Warsh's framing of AI as ultimately disinflationary. A Reuters poll found that 28 of 31 economists expect at least one more BOK hike by year-end, taking the rate to 3%.reuters+2

A Global Debate Takes Shape

The divergence underscores a broader question confronting policymakers worldwide: whether the current phase of AI buildout — with its surging demand for energy, chips, and data centers — represents a transitory supply shock or a persistent source of price pressure. Apollo Global Management's ↗ 3.05% chief economist Torsten Slok has argued that the AI boom "will certainly be inflationary" in its early stages, delaying rate cuts Warsh has suggested should be possible. The Fed's next rate decision is scheduled for July 28-29, with markets widely expecting rates to remain on hold.nbcnews+2