Bank of Korea Raises Economic Growth Forecast to 3.3% Amid Strong Semiconductor Exports

The Bank of Korea has significantly raised its economic growth forecast for this year to 3.3%, citing stronger-than-expected export performance, particularly in the semiconductor sector. However, persistent core inflation pressures have led markets to speculate about the possibility of further interest rate hikes.

According to the revised economic outlook released on August 27, the central bank's forecast for real GDP growth has been increased by 0.7 percentage points from the May estimate of 2.6%. This marks the highest level since May 2021, when the forecast was 4.7%.

The new forecast surpasses the government's estimate of 3.0% and the average forecast of 3.2% from eight major investment banks as of late last month.

The demand for semiconductors, driven by increased global investment in artificial intelligence (AI), has contributed to both export growth and overall economic expansion. The Bank of Korea anticipates that real GDP will grow by 0.3% in the third quarter and 0.5% in the fourth quarter compared to the previous quarters.

Lee Dong-ryul, head of the Bank of Korea's Economic Research Division, stated, "As our industrial structure shifts significantly towards the IT sector, we expect the contribution of IT to growth to remain high next year."

There is also potential for further increases in the growth rate depending on the semiconductor market. The Bank of Korea estimates that if semiconductor demand strengthens and domestic production capacity expands more rapidly than expected, the growth rate could exceed the baseline forecast by 0.2 percentage points this year and 0.6 percentage points next year. Additionally, the current account surplus forecast has been revised upward from $250 billion in May to $450 billion.

On the inflation front, the Bank of Korea expects stronger-than-anticipated upward pressure on prices. While the forecasts for consumer price inflation for this year and next remain unchanged, the core inflation forecast has been raised to 2.5% for both years, an increase of 0.1 and 0.2 percentage points, respectively.

Lee noted, "The core inflation, which reflects underlying price trends, has been adjusted upward due to the ongoing pass-through of accumulated cost shocks and increased demand pressures. Future price trajectories are expected to be significantly influenced by developments in the Middle East and corresponding movements in international oil prices."

With the growth forecast significantly raised and core inflation pressures confirmed, market speculation suggests that the Bank of Korea's tightening cycle is not yet over. Additional interest rate hikes could occur as early as the fourth quarter of this year or at the latest in the first quarter of next year. The dot plot released by the monetary policy committee also indicated that out of 21 members, 10 projected a rate of 3.25% and 6 projected 3.50% six months from now.

However, analysts caution that a growth rate in the 3% range may not immediately lead to steep rate hikes. Much of the growth is concentrated in the semiconductor and IT sectors, and it remains to be seen whether this demand pressure will spread to the broader domestic economy.

Min Ji-hee, a researcher at Mirae Asset Securities, commented, "The current strong growth is concentrated in the semiconductor and IT sectors, which may explain the more dovish projections in the dot plot. Given the limited income improvements in non-IT sectors, sustained interest rate hikes may not be feasible without ongoing demand-side inflation pressures."