Korea Investment & Securities Predicts 1% Economic Growth This Year
Base Rate Expected to Fall to 2.25% by Year-End
USD/KRW Exchange Rate Forecast to Average 1,365 Won in the Second Half
Korea Investment & Securities expects the annual economic growth rate to reach 1% this year, with a modest rebound in GDP growth starting from the second quarter. The base interest rate is projected to be cut by 0.25 percentage points each in May and October, reaching 2.25% by the end of the year. The average USD/KRW exchange rate forecast for the second half is set at 1,365 won.
The Asset Management Strategy Department of Korea Investment & Securities stated in its report, "Macroeconomic Outlook for the Second Half: Let's wait and see," released on May 29, "The Korean economy is expected to grow by 1.0% this year, showing a pattern of a weaker first half and a stronger second half."
The report cited several factors as the background for this outlook: a gradual easing of uncertainty surrounding tariff policies initiated by the Donald Trump administration in the US; the implementation of an additional supplementary budget; and the effects of base rate cuts. By sector, private consumption is expected to rebound slightly in the second half, construction investment is projected to gradually recover, while facility investment is likely to remain somewhat sluggish.
Korea Investment & Securities also stated, "US tariff policy remains a dominant factor shaping this year's economic trends. With the 90-day mutual tariff suspension imposed on major countries, including Korea, set to expire on July 8, uncertainty surrounding tariff policy is expected to ease gradually rather than intensify."
The report further noted, "Since 2000, all administrations have pursued supplementary budget allocations within their first 100 days in office. We expect a supplementary budget of between 20 trillion and 35 trillion won to be allocated in the second half. Considering the first supplementary budget of 13.8 trillion won approved on May 1, the total supplementary budget for this year is expected to be around 35 trillion to 50 trillion won, which would boost this year's economic growth rate by 0.3 to 0.5 percentage points." The report continued, "The 0.75 percentage point base rate cut implemented by the Bank of Korea from October last year to February this year is expected to raise this year's and next year's economic growth rates by 0.17 and 0.26 percentage points, respectively. Given the transmission lag of monetary policy, these effects are expected to become visible from the second half of this year."
Additionally, Korea Investment & Securities forecasts that the Bank of Korea's Monetary Policy Board, meeting today and again on October 23, will cut the base rate by 0.25 percentage points each time. In this case, the year-end base rate will fall from 2.75% to 2.25%. Korea Investment & Securities expects, "If the 2026 growth rate and consumer price inflation rate are in line with our forecasts (1.8%), the Bank of Korea's rate-cutting cycle will likely end at 2.25%."
The report also stated, "After May, the timing of base rate cuts will be determined clearly depending on household debt and financial stability risks, as well as the direction of tariff policy developments under the Trump administration. If real estate prices and household debt continue to rise through the end of the year, the October rate cut we anticipate could be postponed to the second quarter of next year." This year's consumer price inflation rate (2.1%) and core inflation rate (1.9%) are estimated to be broadly consistent with the Bank of Korea's price stability target (2%).
The USD/KRW exchange rate for the second half is expected to average 1,365 won, showing a cyclical decline compared to the first half average of 1,427 won. Moon Daun, a researcher at Korea Investment & Securities, explained, "In the second half, the lower bound could fall to the low 1,300 won range. Externally, a short-term rebound in the US dollar is expected, but the overall trend for the second half is a weaker dollar." Moon added that if there are any revisions to the outlook, a downward adjustment is more likely at this point, citing as potential triggers a further decline in the dollar due to failure to moderate Trump administration policies, as well as the possibility of substantive intergovernmental exchange rate negotiations or heightened market expectations for such negotiations.
In addition, the annual growth rate for the US this year is forecast at 1.6%. The Federal Reserve is expected to maintain a wait-and-see stance, with one rate cut in the third quarter of this year and three more next year.
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