To lay the groundwork for raising interest rates? South Korean Finance Minister: GDP growth is expected to exceed 2% this year, with inflation and real estate risks now being "top priorities."

South Korean Finance Minister Koo Yun-cheol stated at a press conference on Monday, May 11, that supported by the surge in global semiconductor demand, he expects South Korea's economic growth rate to exceed 2% this year. He also specifically warned of the risks of inflation and the real estate market, emphasizing that these are issues that the government needs to address as a priority. Export Engine: Super Demand for Chips The most powerful data support provided by Koo Yun-cheol in the economic outlook is the strong export performance in April. According to data, South Korea's exports in April soared by 48% year-on-year to $85.89 billion, the second-highest monthly record, second only to the historical high of $86.6 billion set in March. Semiconductors are the most significant contributing factor: in April, semiconductor exports surged by 173.5% year-on-year, reaching $31.9 billion, continuously setting monthly records for 13 months in a row. This achievement can be attributed to the surging demand for high-value-added storage products such as High Bandwidth Memory (HBM), DDR5, and NAND flash memory brought about by the expansion of global AI server investments. Prices for storage products have jumped compared to the same period last year - DDR4 8Gb rose by 870%, DDR5 16Gb rose by 662%, and NAND 128Gb rose by 766%. Following a sharp increase of 149.8% year-on-year in March, the growth rate of chip exports further climbed to 173.5% in April, indicating that there is no sign of a slowdown in the construction of AI infrastructure, and production capacity is still relatively scarce. This means that the bargaining power for each storage chip is firmly in the hands of South Korean manufacturers. At the same time, the benefits of the expansion of AI infrastructure have extended to computer exports, including solid-state drives (SSD), with computer exports in April soaring by 515.8% to $4.08 billion, setting monthly record highs for two consecutive months. The "K-shaped differentiation" in export structure also emerged synchronously: while chips surged ahead, automobile exports dropped by 5.5% year-on-year, automobile parts exports declined by 6.0%, and steel and home appliance exports both recorded double-digit declines. Non-IT exports have been suppressed by multiple pressures including tensions in the Middle East, U.S. tariff pressures, and regional supply surpluses. Another set of data attracting market attention comes from the international balance of payments. Data released by the Bank of Korea on May 8 showed that South Korea's current account surplus in March reached $37.33 billion, a historical high for a single month, far exceeding the $23.19 billion in February, and achieving a continuous 35-month surplus since May 2023, the second-longest surplus period in history. During the same period, the goods trade surplus also reached a record level of $35.07 billion, with exports growing by 56.9% year-on-year to a record high of $94.32 billion, and semiconductor exports soaring by 149.8%. The sustained release of growth momentum has triggered a concentration of upward revisions in institutional forecasts. JPMorgan Chase raised its GDP growth forecast for South Korea in 2026 from 2.2% to 3.0%, while Citibank raised it to 2.9%, and Capital Economics and BNP Paribas both raised it to 2.7%. According to Bloomberg's compilation, as of the end of April, the average growth forecast for South Korea in 2026 by 42 institutions was 2.1%, up from 2.0% in the previous month. Downward risk areas: "Dual Pressure" of Inflation and Real Estate At the same press conference outlining the growth blueprint, Koo Yun-cheol emphasized that "inflation and the real estate market are direct risk factors" and pointed out that these are issues that the government needs to address as a priority. The outbreak of the Iran war has been going on for more than two months, with the crucial Strait of Hormuz, through which about 20% of global oil shipments pass, facing a double blockade. As a result, diesel and gasoline prices in April rose by 30.8% and 21.1% respectively year-on-year, marking the largest year-on-year increase since July 2022. South Korea's benchmark Dubai crude oil average price in April reached $105.37 per barrel, a 55.6% year-on-year surge. Against this backdrop, South Korea's Consumer Price Index (CPI) rose to 2.6% year-on-year in April, a significant increase from 2.2% in March, marking the largest annual increase since July 2024; petroleum product prices surged by 21.9% year-on-year, reaching a new high since the Russia-Ukraine war. Core inflation remained stable at 2.2%. More critically, the expected self-fulfilling channel is opening up - the one-year inflation expectation for April has risen to 2.9%, up by 0.2 percentage points from March, with just one step away from the 3% alert threshold. In April, the year-on-year increase in the Consumer Price Index reached 2.9%, indicating that the most frequently perceived price increase by residents has surpassed the overall CPI, with every 1 percentage point increase in perceived inflation driving up the inflation expectation by 0.66 percentage points - exactly the "spiral of expectations" path that the Bank of Korea is most vigilant against. JPMorgan Chase raised its inflation forecast for 2026 from 1.7% to 2.7%, DBS Bank raised it to 2.6%, and Bank of America Merrill Lynch raised it to 2.9%. As of the end of April, the average inflation forecast for 2026 by 38 institutions compiled by Bloomberg has risen to 2.5%. According to international investment banks and relevant institutions' analysis, if the tense situation in the Middle East continues, and international energy prices continue to rise, South Korea's inflation level may exceed the 3% threshold between May and September. The Bank of Korea clearly stated that influenced by oil prices, it is expected that the CPI will accelerate from April onwards. Senior Deputy Governor of the central bank, Ryoo Sang-dai, sent a rare hawkish signal, stating, "It's time to consider stopping rate cuts, and possibly even raising rates," and pointing out that the benchmark interest rate has remained unchanged at 2.50% for seven consecutive times since May last year. At the same time, Koo Yun-cheol emphasized that real estate is a "direct risk factor", warning the outside world that despite the considerable trade surplus and economic growth brought about by chip exports, the massive household debt deeply intertwined with real estate is looming over the South Korean economy. The key point is that within the context of the high growth driver of chip exports, there are structural problems inherent in the real estate market itself, and the powerful regulatory policies aimed at addressing these issues may trigger systemic chain reactions that could backlash against overall financial and economic stability. Next few months: The "Policy X Factor" at a critical juncture Koo Yun-cheol also highlighted at the press conference that "the specific growth rate will depend on the chip cycle and the Middle East war". The strong data in the first half of the year is largely the result of the first-quarter policy stimulus and export efforts working together. Koo Yun-cheol previously pointed out that the strong rebound in first-quarter GDP is closely related to the government's policy measures since taking office. However, there is a structural challenge behind this: according to the analysis of the Bank of Korea, if the IT manufacturing industry is excluded, South Korea's economic growth rate will decrease by about 0.4 percentage points. In the "K-shaped structure", the wealth of a few industries and laborers is growing rapidly, while the majority of workers are stagnating. The central bank has issued a warning that interest rates are not an appropriate tool to solve this structural issue of the K-shaped recovery; instead, the problem needs to be addressed through fiscal policy and institutional reforms. The implication is that monetary policy has been relieved of the mission of "repairing the K-shaped imbalance" and should focus solely on inflation and exchange rate stability. Looking ahead to the next few months, the South Korean economy will enter a hopeful window. The monetary policy committee meeting of the Bank of Korea on May 28 will be crucial, as the signal on interest rate movements will become clearer. The market has already priced in expectations of one to two rate hikes. Major central banks globally - the Federal Reserve, the European Central Bank, and the Bank of Japan - all maintained interest rates last month, but analysts view this as a "hawkish pause" aimed at preventing a resurgence of inflation. According to the FRA rate prediction model of the South Korean news agency Infomax, as of August 8, the market's implied interbank lending rate has risen to 2.834%, implying a path of about 1.5 rate hikes from the current benchmark rate of 2.50%. The market interprets this as a high likelihood that the Bank of Korea will initiate a rate hike in July. A bond manager at an asset management company stated, "Expectations are for a further surge in May's price data, and the pressure on the central bank has become urgent. Unless there is a significant unexpected event, a rate hike in July is highly probable." Koo Yun-cheol has set out a growth strategy for the South Korean economy of "reversing the decline and revitalizing the upswing", but in the specific path - balancing between fiscal and structural reforms, interest rate decisions under high inflation pressure, supply-demand considerations in real estate regulation - each step needs to be carefully taken in the fragile balance.