Economic Forecasts by KDI

SEOUL (Reuters) – South Korea’s state-run think tank announced a need for early interest rate cuts, citing weaker economic growth and inflation amid sluggish domestic demand.

Economic Growth Projections

The Korea Development Institute (KDI) revised its economic forecasts, expecting a growth rate of 2.5% in 2024, down from 2.6% projected three months ago. The projection for 2025 remains at 2.1%.

Domestic Demand and Recovery

The KDI highlights continuing weak domestic demand as a factor delaying economic recovery, even with stronger growth in exports. A KDI official noted, “High interest rates are the biggest factor behind weak domestic demand and hope that interest rates will be adjusted soon.”

Inflation Forecasts

The think tank also revised its inflation forecasts to 2.4% in 2024 and 2.0% in 2025, down from 2.6% and 2.1% previously forecasted. It anticipates consumer inflation will slow to an average of 2.0% in the second half of the year, aligning with the central bank’s medium-term target.

Contextual Analysis

KDI’s insights, though often considered as the views of the finance ministry, indicate trends affecting policy decisions. South Korea’s economy saw an unexpected contraction in Q2, the sharpest since 2022, plagued by declining consumer spending despite an export boom.

In the previous month, the Bank of Korea considered rate cuts after maintaining a 15-year high interest rate of 3.50% for twelve consecutive meetings, with board members divided on the timing due to financial stability concerns.