South Korea's economy continued its unexpected growth in the second quarter, increasing the likelihood of an additional interest rate hike by the Bank of Korea. If the consumer price index for July, set to be released next month, remains high, expectations for a consecutive rate increase in August will strengthen.
According to the Bank of Korea on July 23, the real gross domestic product (GDP) grew by 0.6% in the second quarter compared to the previous quarter. This figure significantly exceeds the central bank's forecast of 0.2% made in May. After recording a growth rate of -0.1% in the fourth quarter of last year, the economy rebounded with a growth of 1.8% in the first quarter and maintained a solid trajectory in the second quarter.
The quality of growth has also improved. The real gross domestic income (GDI) rose by 3.6% from the previous quarter and by 15.6% year-on-year. The gap between the GDP growth rate and the GDI growth rate widened to 11.9 percentage points, the largest since the Bank began tracking these statistics in 1960.
Lee Dong-won, head of the Bank of Korea's Economic Statistics Division, stated, "The increase in real purchasing power due to changes in relative prices of exports and imports was greater than the increase in production. The improvement in real GDI can lead to increased corporate investment and household purchasing power, which may positively impact domestic demand in the future."
As a result, the possibility of the annual growth rate exceeding 3% has increased. Market analysts are also revising their growth forecasts upward. Ha Geon-hyung, an economist at Shinhan Investment Corp., noted, "Reflecting the strong semiconductor market in the first half and the potential for domestic demand expansion in the second half, we are raising our growth forecast for this year from 3.1% to 3.3%."
The stronger-than-expected growth is also raising the possibility of further interest rate hikes by the Bank of Korea. With the growth rate significantly exceeding expectations and the expansion of real GDI confirming the potential for improved corporate investment and household purchasing power, the justification for maintaining a tightening stance has been strengthened.
Earlier, Bank of Korea Governor Lee Ju-yeol indicated on July 16, after raising the benchmark interest rate to 2.75%, that he would assess the possibility of an "August consecutive hike" based on the second quarter GDP and GDI figures and the July consumer price inflation rate. There are expectations in the market that the previously anticipated timing for an additional rate hike in October could be moved up to August.
Kim Jin-wook, an economist at Citibank Korea, remarked, "Considering the stronger-than-expected GDP and GDI, there is a high likelihood of a 0.25 percentage point increase in the benchmark interest rate at the August Monetary Policy Committee meeting. Both growth and inflation are moving in a direction that supports the Bank of Korea's tightening stance."
Market attention is now focused on the July consumer price index. While there are forecasts that inflation may slow, the ongoing rise in energy prices due to instability in the Middle East could prolong inflationary pressures longer than expected. The consumer price inflation rates were recorded at 3.1% in May and 3.2% in June, marking two consecutive months above 3%. If the July consumer price inflation rate exceeds market expectations, the likelihood of the Bank of Korea implementing consecutive interest rate hikes will increase further.
* This article has been translated by AI.
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