Limited recovery seen as consumption rebounds, with markets eyeing possible October cut

Bank of Korea Gov. Rhee Chang-yong speaks in a press conference at the central bank’s headquarters in Seoul, Thursday. (Joint Press Corps/Yonhap)
Bank of Korea Gov. Rhee Chang-yong speaks in a press conference at the central bank’s headquarters in Seoul, Thursday. (Joint Press Corps/Yonhap)

The Bank of Korea forecast a limited recovery for Asia’s fourth-largest economy this year, raising the country’s growth estimate by 0.1 percentage point on Thursday while keeping the benchmark rate steady at 2.5 percent.

The central bank revised its projection for growth in this year’s gross domestic product, a key indicator of economic performance, from 0.8 percent to 0.9 percent — the first upward revision for this year’s estimate.

After initially projecting 2.3 percent growth in November 2023, the BOK repeatedly lowered the figure to 2.1 percent in May 2024, 1.9 percent in November, 1.5 percent in February, and 0.8 percent in May.

“The stronger-than-expected recovery in consumption, supported by the supplementary budget and improved economic sentiment, contributed about 0.2 percentage point to this year’s growth outlook,” BOK Gov. Rhee Chang-yong said at a press briefing at the bank’s headquarters in Seoul.

“The Korea-US tariff negotiations last month showed little deviation from the tariff levels projected in May, while the semiconductor boom lasted longer than expected and automobile exports remained favorable,” he added.

Rhee noted that construction investment remains the key drag on the economy.

“If the construction investment growth rate, estimated at minus 8.3 percent this year, were assumed to be zero, the economic growth forecast would have reached 2.1 percent,” he said.

The 0.9 percent projection aligns with the Finance Ministry’s outlook released on Aug. 22. It is slightly above the 0.8 percent forecasts of the International Monetary Fund and the Korea Development Institute but still below the OECD’s 1 percent projection.

For 2026, the BOK kept its forecast unchanged at 1.6 percent. If realized, Korea’s growth would stay below 2 percent for a second straight year.

“It appears Korea’s potential growth rate has fallen below 2 percent,” Rhee said, citing structural constraints such as the aging population.

Meanwhile, the central bank’s Monetary Policy Board left its policy rate unchanged at 2.5 percent, marking a second consecutive freeze following July’s decision. This pause contrasts with two cuts earlier this year, totaling 0.5 percentage point, aimed at supporting the slowing economy.

Despite holding steady this time, Rhee reaffirmed the BOK’s dovish stance, saying, “The monetary easing stance is likely to continue through the first half of next year.”

Market analysts expect the easing cycle to resume soon.

“Considering the dovish tone of the press conference and the BOK’s policy direction, the possibility of an interest rate cut in October is significant,” said Kim Myeong-sil, an analyst at iM Securities.

Kang Seung-won, an analyst at NH Investment & Securities, echoed that view: “The BOK has effectively signaled a potential interest rate cut in October.”


silverstar@heraldcorp.com