Growth Outlook Raised to '2.0%'... Unanimous Rate Hold, 'Hold Favored' in Six Months (Comprehensive)

Base Rate Kept at 2.50%... Sixth Consecutive Hold Since July Last Year
Semiconductors Soar and Domestic Demand Recovers, Growth Outlook Raised to 2.0%
K-Style Dot-Plot Rate Projections Introduced, Hold Scenario Dominant
Minor Possibility of a Cut

The Bank of Korea has raised its forecast for Korea's economic growth this year to 2.0 percent, a figure that corresponds to the upper end of the potential growth rate range of 1.8 to 2.0 percent. The upward revision reflects several factors: exports, led by semiconductors, are growing more sharply than expected, and domestic demand is improving gradually as consumer sentiment recovers. The base rate was kept unchanged at 2.50 percent per annum by unanimous vote of the Monetary Policy Board members. Under the new K-dot plot method of rate projections introduced at this meeting, the probability of a rate hold in six months was seen as the highest, while a minority saw room for a cut and a very small minority for a hike.

Lee Changyong, governor of the Bank of Korea, is tapping the gavel at the plenary session of the Monetary Policy Committee held at the Bank of Korea headquarters in Jung-gu, Seoul, on the 26th. Photo by the Joint Press Photographers' Pool.

2.0% growth forecast for Korean economy this year... Strong exports driven by semiconductors

In its economic outlook released on the 26th after the Monetary Policy Board meeting on monetary policy direction held at the Bank of Korea headquarters in Jung-gu, Seoul, the Bank of Korea projected that the Korean economy will grow by 2.0 percent this year. This comes three months after it raised its November 2025 forecast of 1.8 percent by 0.2 percentage point, and now it is projecting an additional 0.2 percentage point increase. The growth forecast for next year was revised down by 0.1 percentage point from 1.9 percent to 1.8 percent.

This year's 2.0 percent growth forecast is the same as the projection announced by the government last month and is higher than the 1.9 percent forecasts recently released by the International Monetary Fund (IMF) and the Korea Development Institute (KDI). It is slightly below the 2.1 percent projection of the Organisation for Economic Co-operation and Development (OECD).

The Bank of Korea raised its growth forecast this time because it judged that both exports and domestic demand have stronger upside factors than at the time of the November 2025 projection. In particular, the better-than-expected semiconductor cycle is cited as the single biggest factor behind the higher growth outlook. The Bank expects the steep improvement in the semiconductor sector to drive exports and facility investment, thereby boosting overall growth momentum. At a National Assembly briefing on government affairs on the 23rd, Bank of Korea Governor Lee Changyong said, "Despite uncertainty related to U.S. tariff policy, this year's growth rate will be significantly higher than last year's, as exports continue to increase on the back of a favorable semiconductor cycle."

In fact, Korea's export performance this year has been on a solid trajectory. According to the Korea Customs Service, exports in January came to USD 65.8 billion, up 33.8 percent from a year earlier. Of this, semiconductor exports totaled USD 20.69 billion, up 102.5 percent year-on-year, leading the overall increase. In February, exports reached USD 43.5 billion in the first 20 days alone, up 23.5 percent from the same period a year earlier. Notably, semiconductor exports surged 134.1 percent during the same period, with their share of total exports expanding to 34.7 percent.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Board plenary meeting held on the 26th at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by the Joint Press Photographers

KOSPI 6000 era, consumer sentiment recovery... Expectations for domestic demand improvement

Expectations for an improvement in domestic demand, driven by a recovery in consumer sentiment, also supported the upward revision of the growth forecast. Along with strong exports centered on semiconductors, the bullish stock market, including the KOSPI surpassing the 6,000-point level, is boosting optimistic assessments of the economy and positively influencing the spending appetite of economic agents. The Composite Consumer Sentiment Index (CCSI) released by the Bank of Korea stood at 112.1 in February, rising for the second consecutive month. According to the National Data Office (formerly Statistics Korea), retail sales, a key indicator of domestic consumption trends, increased by 0.5 percent last year, rebounding for the first time in four years.

However, uncertainty factors that could dampen growth remain. Even though the Korea-U.S. trade negotiations have been concluded, risks related to U.S. tariff policy persist, and the high dependence of growth on semiconductors is also cited as a major risk factor. Construction investment, which dragged down growth last year, is another downside factor. Construction investment is expected to see some easing of last year's contraction this year. However, there are analyses that the recovery in construction investment may be slower than expected, as construction orders are not translating into actual ground-breaking and the slump in regional real estate markets is overlapping.

The forecast for consumer price inflation was revised up to 2.2 percent, an increase of 0.1 percentage point from the November 2025 projection. The forecast for next year was kept at 2.0 percent. Although this year's forecast was raised slightly, the Bank of Korea expects inflation to remain stable near the 2 percent target level amid offsetting upward and downward pressures from declining and stabilizing international oil prices and a strong won exchange rate. Consumer price inflation in January was 2.0 percent, the lowest in five months.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary session held at the Bank of Korea's main building in Jung-gu, Seoul, on the 26th. Photo by Joint Press Pool

Rate hold in February, 'hold highly likely' over the next six months... "Rate hike scenario also explored"

At its meeting on the day, the Monetary Policy Board kept the base rate unchanged at 2.50 percent per annum and assessed that there is a high likelihood that the current rate level will be maintained six months from now.

Starting with this meeting, the Bank of Korea introduced a six-month-horizon K-dot plot to its forward guidance on the conditional base rate projections of Monetary Policy Board members. Including the Governor, the seven board members each place three dots on different rate levels for six months ahead, taking into account the baseline outlook and upside and downside risks. They may place all three dots at the same rate level or at different levels. The distribution of the 21 dots in total allows markets to gauge the members' views on the future path of the policy rate.

According to the K-dot plot-based rate projections, 16 out of the 21 dots pointed to a rate hold in six months, or about 76 percent of the total. Four dots projected a base rate cut to 2.25 percent in six months. A minority rate hike scenario was also explored: one dot pointed to 2.75 percent, assigning some weight to the possibility of a rate increase from the current level. Market participants, however, judged that the likelihood of a hike signaled by the dot plot is not high, given that the growth forecast was revised up to 2.0 percent but remains within the expected range, and that next year's forecast was revised down by 0.1 percentage point. The single dot at a higher rate in this outlook is interpreted as "a hawkish scenario put forward by the most hawkish board member," meaning the actual probability of a hike is considered low. Rather, the presence of four dots at lower rates indicates that at least two members see some possibility of a cut, which has led markets to feel more relieved than worried about the prospect of rate hikes.

Market participants also widely expect the rate to be kept unchanged for the rest of the year, projecting a prolonged period of on-hold policy. After this holding phase, views on the direction of monetary policy diverge between a hike and a cut. Cho Yonggoo, researcher at Shinyoung Securities, said, "For the time being, it is necessary to take into account the overheated housing market in the Seoul metropolitan area from a financial stability perspective, as well as ample liquidity in financial markets and the weak won," adding, "With government policy responses focused on stabilizing the real estate market and the exchange rate, the policy rate is likely to remain unchanged for a considerable period." Han Junhee, senior researcher at the NH Financial Research Institute, also noted, "Under current conditions, the need for additional monetary easing is limited," and "a cautious stance is likely to be maintained."

Meanwhile, the rate hold on the day marked the sixth consecutive decision to keep the rate unchanged, following the decisions in July, August, October, and November last year and January this year. The outcome was in line with market expectations. In a prior expert survey by The Asia Business Daily, all 15 respondents predicted a rate hold for this month. The decision to keep the rate unchanged was supported by the fact that inflation is stable near the 2.0 percent target and that the growth outlook has turned more optimistic than before, with this year's growth forecast revised up to 2.0 percent, while uncertainties in the foreign exchange and real estate markets remain.

The Monetary Policy Board stated on the day, "With inflation continuing a stable trend near the target level and growth expected to show a better-than-expected improvement, and with risks from the financial stability side also persisting, we judge it appropriate to maintain the current level of the base rate while monitoring domestic and external policy conditions," it said. Accordingly, going forward, monetary policy will continue to support the recovery of growth momentum, while decisions will be made by monitoring changes in domestic and external policy conditions, the resulting inflation trajectory, and financial stability conditions throughout this process.

Factors that could undermine financial stability, such as the exchange rate, real estate, and household debt, remain a source of concern. According to the Korea Real Estate Board, apartment sale prices in Seoul in the third week of February (as of the 16th) rose 0.15 percent from the previous week. Due to the government's strong real estate measures and President Lee Jaemyung's pressure on multiple-home owners, apartment prices in Gangnam-gu, Seoul, rose only 0.01 percent, narrowing the overall increase by 0.07 percentage point, but the upward trend remains intact.

In the Seoul foreign exchange market the previous day, the won-dollar exchange rate closed at 1,429.4 won per dollar on a weekly closing basis (as of 3:30 p.m.), down 13.1 won from the previous trading day, and in early trading on the day it edged slightly lower to trade in the mid-1,420 won range. Compared with late last year, when the rate climbed above 1,480 won and threatened to breach the 1,500 won level, it has fallen significantly. However, heightened volatility persists, with geopolitical risks such as the potential for conflict between the United States and Iran and net selling of Korean equities by foreign investors weighing on sentiment. From the beginning of this month through the previous day, the average daily trading range of the won-dollar exchange rate was 8.4 won, higher than in December last year, when it hovered near 1,500 won (5.3 won), and January this year, which also saw volatile trading (6.6 won).

This content was produced with the assistance of AI translation services.