The forecast also put South Korea's growth at 2.7 percent for next year. The 2026 forecast was 1 percentage point higher than Moody's 2.5 percent estimate in May and 1.7 percentage points higher than its 1.8 percent forecast in February.
The latest estimate exceeds the South Korean government's 3 percent projection and the 3.2 percent average among eight major investment banks compiled by the Korea Center for International Finance as of the end of July.
Moody's said the revision was largely driven by stronger demand for advanced memory chips as global investment in artificial intelligence (AI) grows. It expects the chip upcycle to remain strong until at least mid-2027, as South Korean suppliers face limited competition from alternative sources. However, the report did not change South Korea’s credit rating or signal an imminent rating change.
The higher forecast does not mean the recovery is spreading evenly throughout the economy, as retail sales fell 1.7 percent in the second quarter before rebounding 2.7 percent in June and growth remains heavily concentrated in semiconductor exports and related investment.
Headline consumer inflation slowed to 2.8 percent in July from 3.2 percent in June, but core inflation — which excludes volatile food and energy prices to show the underlying trend — edged up to 2.6 percent from 2.5 percent, while household credit and housing prices remain financial-stability arguments for further tightening.
The Bank of Korea raised its base rate by 25 basis points to 2.75 percent on July 16, its first increase in three and a half years, and will decide on Aug. 27 whether to raise it for a second consecutive meeting.
At around 2 p.m. Tuesday, the three-year Korean government bond yield was up 6.6 basis points at 3.862 percent and the 10-year yield was 10.3 basis points higher at 4.416 percent, with one basis point equal to 0.01 percentage point.
Traders call the larger increase in the 10-year yield a bear-steepening of the curve, with the three-year yield responding more closely to expectations for the BOK's policy rate and the 10-year also reflecting longer-term growth, inflation, government bond supply and investor demand.
The larger move in the 10-year yield reflected both higher U.S. long-term rates and supply pressure from Tuesday's 3 trillion won auction of 10-year Korean government debt, but the rise in the policy-sensitive three-year yield indicates that markets have not dismissed the possibility of an August increase.
Official U.S. Treasury data put the 10-year yield 4 basis points higher at 4.72 percent and the 30-year up 6 basis points at 5.31 percent on Monday, before the 30-year cash-market yield reached 5.321 percent in Asian trading, its highest since June 2007, while the inflation-adjusted 30-year rate rose to 3.06 percent.
Heavy borrowing by the U.S. government and AI companies has added to the pressure because issuers generally have to offer higher returns when bond supply grows faster than investor demand, pushing down the prices of existing bonds and raising their yields.
The expiry of a 60-day U.S.-Iran ceasefire and uncertainty over the Strait of Hormuz also pushed Brent crude above $91 a barrel, preserving the risk that more expensive energy could feed into Korean inflation.
South Korean government bond yields serve as reference rates for corporate debt and bank funding, meaning that persistently high yields can increase the cost of issuing corporate bonds and eventually lift rates on business loans, mortgages and other household borrowing.
More expensive credit can discourage companies from investing and households from spending, producing an effect similar to a BOK rate increase even if the central bank leaves its policy rate unchanged.
"Bond markets have already strongly reflected the shift in monetary policy, reducing the need for additional hawkish guidance," said Ahn Jae-kyun, an economist at Korea Investment & Securities.
Ahn nevertheless maintained an August rate increase as his base case on Aug. 4, while estimating that markets were still assigning a probability of more than 50 percent to another move.
Moody's growth revision, firmer core inflation and financial-stability risks support another increase, while the export-heavy recovery, higher market borrowing costs and a stronger won give the BOK reasons to assess the effects of its previous move before raising rates again.
The Aug. 27 decision therefore remains open between another increase and a "hawkish hold," meaning that the BOK could leave rates unchanged while signaling that further tightening remains possible if oil, core inflation, the won or household credit deteriorates.
AJP Takeaways
• Moody's raised South Korea’s 2026 growth forecast to 3.5 percent in an Aug. 13 periodic review, up from 2.5 percent on May 11 and 1.8 percent on Feb. 12.
• Higher government bond yields can raise corporate and household borrowing costs, partly tightening the economy even without another immediate BOK rate increase.
• The BOK's Aug. 27 decision remains open because a stronger won reduces imported-inflation pressure, while core inflation, oil, housing and household credit continue to support a hawkish stance.
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