SEOUL- South Korea’s state-run think tank on Thursday said there was a need for early cuts in interest rates, as it flagged weaker economic growth and inflation amid sluggish domestic demand.
In its revised economic forecasts, the Korea Development Institute (KDI) said the economy was expected to grow 2.5 percent in 2024, down from 2.6 percent seen three months earlier, while keeping its projection for 2025 at 2.1 percent .
Domestic demand is seen remaining weak and delaying the economic recovery, despite stronger growth in exports, according to the think tank.
“We are seeing high interest rates as the biggest factor behind weak domestic demand and hope that interest rates will be adjusted in the near future,” a KDI official said.
KDI also cut its inflation forecasts to 2.4 percent in 2024 and 2.0 percent in 2025, from 2.6 percent and 2.1 percent seen previously.
In the second half of this year, consumer inflation is expected to slow to an average of 2.0 percent , which is the central bank’s medium-term target, KDI said.
KDI often conducts research for the government but rarely gives specific policy suggestions. Market participants tend to regard policy advice from the think tank as the views of the finance ministry.
South Korea’s economy unexpectedly shrank in the second quarter and logged the sharpest contraction since 2022, as slumping consumer spending undermined an export boom.
Last month, the Bank of Korea opened the door for rate cuts after holding interest rates at a 15-year high of 3.50 percent for the 12th straight meeting, but the board was divided over when to act amid financial stability concerns.
South Korea’s economy unexpectedly shrank in the second quarter, clocking the sharpest contraction since 2022 as slumping consumer spending undermined an export boom, reinforcing expectations that an interest rate cut could be imminent.
Gross domestic product (GDP) for the April-June period fell 0.2 percent from a quarter earlier in seasonally adjusted terms, data from the Bank of Korea showed, missing a 0.1 percent gain seen by analysts in a Reuters poll. It was the sharpest fall since the fourth quarter of 2022.
Capital Economics said the data suggests domestic demand will only worsen.
“The weakness of the latest GDP figures give us more confidence in our view that interest rate cuts are around the corner,” Capital Economics said in a note. “While we expect the central bank to loosen policy starting from October, the risk of a rate cut in August has risen now.”
Other analysts, however, say the BOK will not deliver a rate cut until next quarter, choosing instead to wait for the US Federal Reserve to move first. Markets are currently fully pricing in a Fed rate cut in September.
The performance follows a 1.3 percent expansion seen in the the first, quarter, opens new tab, the fastest pace since the fourth quarter of 2021, and keeps Asia’s fourth-largest economy on course to hit the bank’s projection of a 2.5 percent growth this year, said Shin Seung-chul, head of the bank’s statistics bureau at a news conference.
On an annual basis, Asia’s fourth-largest economy grew 2.3 percent, compared with a gain of 3.3 percent in the first quarter of 2024.
Both private consumption and construction investment declined 0.2 percent and 1.1 percent from a quarter earlier, respectively, while exports increased 0.9 percent.
