Bank of Korea Projects Continued Chip Boom, Boosting South Korea’s Economic Growth by 0.7 Percentage Point
South Korea’s central bank maintained its benchmark interest rate on Thursday, signaling a potential pivot towards tighter monetary policy, while simultaneously elevating its 2026 economic growth forecast to 2.6 percent.
The Monetary Policy Board opted to keep the key rate steady at 2.5 percent, thereby extending a rate freeze that has been in place since May 2025. However, more hawkish signals emerged from the meeting, with two of the seven board members advocating for a 25-basis-point rate hike.
“Whether looking at inflation, growth, the exchange rate or the property market, the direction is clear,” Bank of Korea Governor Shin Hyun-song stated at a press conference held shortly after the rate-setting decision at the central bank’s headquarters. This meeting marked Governor Shin’s first since assuming office in late April.
“Raising the base rate would provide an opportunity to handle them all at once,” Shin commented, suggesting a comprehensive approach to current economic challenges.
He further elaborated that the central bank is preparing to embark on a rate-hike cycle, with key considerations revolving around the timing, speed, and ultimate extent of such increases.
Persistent inflationary pressure stands as the primary factor compelling the central bank to consider an interest rate hike.
Governor Shin highlighted that escalating oil prices, a direct consequence of the Middle East conflict, are actively pushing up consumer inflation. He also warned of an increasing risk of these inflationary pressures spilling over into manufactured goods, service prices, and broader inflation expectations.
In April, consumer prices registered a 2.6 percent year-on-year increase, surpassing the Bank of Korea’s 2 percent inflation target. This figure also represented an acceleration from the 2.2 percent recorded in March.
Shin noted, “Looking at broader indicators, inflationary pressure remains fairly strong, and we expect inflation to peak sometime in the second half of the year.”
A strengthening economic outlook further provides the groundwork for the Bank of Korea to consider raising rates. On Thursday, the central bank revised its growth forecast for the Korean economy upward to 2.6 percent from the 2 percent projected in February, citing robust semiconductor exports.
Governor Shin projected that the current semiconductor (chip) boom is expected to continue for a considerable period rather than being short-lived.
“Semiconductors are not products whose output can be ramped up significantly in a short period of time,” Shin explained. He added that stronger-than-expected global demand for these high-tech components is projected to contribute an additional 0.7 percentage point to the country’s overall economic growth.
He also suggested that if the ongoing conflict in the Middle East is resolved, South Korea’s economic growth could potentially exceed the 2.6 percent forecast.
The prolonged weakness of the Korean won against the U.S. dollar adds another layer of pressure on the central bank. A depreciating currency can fuel broader inflationary pressures by driving up the costs of imports.
In recent trading sessions, the won has traded above the 1,500-per-dollar level, a valuation reminiscent of past financial crises. On May 22, the won closed at 1,517.2 per dollar, exceeding the 1,150 level for the first time since April 2. During intraday trading, it touched a low of 1,519.4 per dollar, nearing the critical 1,520 mark.
“We will not tolerate one-sided moves in the currency market,” Shin affirmed, signaling that the central bank is prepared to act against excessive volatility and sharp, unilateral swings in the foreign exchange market.
He emphatically concluded, “We have the tools, the will and the means to act. I want to make that point unequivocally clear,” underscoring the Bank of Korea’s firm commitment to market stability.
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