Think tank revises growth forecast for Korea, calls for rate cut

[Photo by Yonhap]

The Korea Development Institute (KDI), a South Korean policy think tank, downgraded the country‘s economic growth rate and suggested a key interest rate cut in August 2024, making an unusual comment on the central bank’s monetary policy as concerns over sluggish domestic demand persist.

In its revised economic outlook for the year, released on Thursday, the KDI revised the nation‘s economic growth rate to 2.5 percent from 2.6 percent. This comes after KDI sharply raised its growth forecast from 2.2 percent to 2.6 percent in May.

“The semiconductor market performed better than expected, leading to an upward revision in exports,” the report said. “However, prolonged high interest rates led to a downward adjustment in domestic demand, bringing the overall economic growth rate down to 2.5 percent.” While strong chip-driven exports have bolstered the economy, the impact of weak Korean demand has been significant, preventing overall economic vitality, according to the think tank.

The primary issue identified was high interest rates. KDI noted that prolonged high rates “could put downward pressure on domestic demand” amid the accumulation of private debt. Arguing that the optimal time for a rate cut to “revive” this demand has already passed, KDI stressed the need for a rate cut in August 2024, suggesting the Monetary Policy Board meet within the month.

KDI also recommended that preemptive loan regulations from financial authorities, followed by a rate cut, could minimize side effects such as a surge in household debt. “With the introduction of macroprudential policies to ensure financial stability, there would be room for the Bank of Korea to cut interest rates to a level below the current one,” KDI said.