JP Morgan holds the view that its already above-consensus interest rate projection for South Korea faces upside risks, provided that a semiconductor-driven expansion stokes stronger inflation while credit and financial markets stay stable. The Wall Street bank anticipates the Bank of Korea will hike in November, followed by additional moves in February and May of next year, bringing the benchmark rate to 3.75% within this tightening cycle.
That figure surpasses the 3.5% median forecast from a survey of economists, which also expects rates to hold at that level until the second quarter of 2028. "We're talking about 3.75%, but at this stage, the upper bound of the terminal rate is far from certain," said JP Morgan economist Seok Gil Park in an interview. "We are experiencing a macroeconomic shock of unprecedented scale."
The possibility of a higher peak rate underscores the challenge facing the Bank of Korea as an exceptional chip boom sweeps through Asia's fourth-largest economy. A key uncertainty lies in how the semiconductor surge will transmit to the broader economy—its impact is already visible in corporate investment, but far less clear in household consumption.
Following the July rate increase, Park was among the first economists to predict an August move. He now projects South Korea's economy will grow 3.8% this year and 3.3% next year, compared with the central bank's forecasts of 3.3% and 2.9%, respectively. For the third quarter, the divergence is more pronounced: JP Morgan expects GDP to expand roughly 1% quarter-on-quarter with risks tilted to the upside, while the Bank of Korea estimates around 0.3%.
Park suggests the Bank of Korea may again revise up its growth outlook when it updates projections in November. Ahead of that, the central bank typically outlines upside and downside risks to its upcoming forecasts in its October policy statement. He added that if officials emphasize upside growth risks—citing oil prices, Federal Reserve policy, and economic activity trends—the statement could carry a more hawkish tone.
The Bank of Korea delivered consecutive rate hikes in August, following an earlier increase in July. Those moves brought the policy rate to 3%, marking the first back-to-back hikes in over three years. The median projection for the six-month rate outlook released in August stood at 3.25%, implying one more 25-basis-point increase during that period. Authorities are expected to hold rates steady at their next decision on October 22.
Minutes from the August meeting show policymakers remain open to further tightening, though they express varying degrees of caution regarding the pace. Large bonuses and wage increases at chipmakers could boost spending, but since the share of workers directly benefiting is relatively small, the broader impact may be limited.
"When income growth is concentrated among certain groups, the boost to overall consumption is limited—after all, people can't eat three or four lunches a day," Park said. What matters more for the broader economy is the second and third-round effects of chip profits flowing through suppliers, wages, and other industries. The extent of this transmission will help determine whether the chip boom remains primarily an export and investment story or begins generating stronger domestic demand.
Such a shift could produce more persistent inflationary pressures. JP Morgan expects inflation to ease toward the Bank of Korea's 2% target, but Park believes the risk that price pressures prove stickier than currently anticipated is greater. He is closely monitoring core inflation, particularly manufactured goods excluding petroleum products and personal services. He added that monthly price increases in these categories have remained elevated, making it premature to conclude inflation is sustainably settling near the central bank's target.
A potential offsetting factor is the recent appreciation of the Korean won, which helps reduce imported price pressures. The sole dissenter at the Bank of Korea's August meeting cited the stronger won as a reason the need for restrictive policy to combat a weak currency had diminished. However, Park noted that further won appreciation does not necessarily signal a dovish tilt in monetary policy. While a stronger local currency lowers import costs, appreciation driven by improved terms of trade and rising real incomes could also strengthen domestic demand and heighten price pressures.
"That's why a balanced approach to growth, inflation, and financial stability is essential," he said.
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