Banks Lift South Korea Growth Forecasts After Strong Q1, Fueling Rate-Hike Talk

Pyeongtaek Port in Gyeonggi Province. [Photo=Yonhap]

South Korea’s economy posted much stronger-than-expected growth in the first quarter, prompting major financial institutions at home and abroad to raise their full-year forecasts. Some global investment banks said the country’s fundamentals look firmer than expected, reviving speculation that the Bank of Korea could eventually shift toward rate increases.

As of April 24, the financial industry said JPMorgan raised its 2026 annual gross domestic product growth forecast to 3.0% from 2.2%, a jump of 0.8 percentage points. The bank cited strong momentum in exports and facility investment as key drivers.

Park Seok-gil, an economist at JPMorgan, said growth could slow in the second quarter due to base effects from the first quarter and the impact of the Middle East war. Still, he said upside risks are large compared with the bank’s earlier conservative view of 0% growth, and that it was raising its second-quarter outlook to reflect strong export and investment momentum. Over the medium to long term, he added, a technology cycle and improved corporate earnings could lift facility investment and increase the contribution from net exports.

Citibank also raised its outlook. In a report, economist Kim Jin-wook said the bank was lifting its 2026 growth forecast to 2.9% from 2.2% to reflect the stronger-than-expected first-quarter GDP figure.

Other firms made smaller upward revisions. Nomura raised its forecast to 2.4% from 2.3%, and Goldman Sachs increased its estimate to 2.5% from 1.9%. South Korean brokerages also moved higher, with Samsung Securities and KB Securities each at 2.7% and Daishin Securities at 2.5%, reinforcing expectations for mid-2% growth this year.

Lee Jeong-hoon, a researcher at Daishin Securities, said the first-quarter surprise means that, arithmetically, the economy could still grow 2.4% even if it posts zero growth through year-end. He said export momentum may gradually cool in the second half, but domestic demand excluding construction investment could remain solid if the stock market avoids major swings.

With growth proving stronger than expected, attention has turned to the Bank of Korea. Analysts said persistent inflation pressure, alongside resilient growth, is strengthening the case that policy rate increases could become a reality.

Citing the GDP data, JPMorgan forecast the central bank would shift to a “gradual hiking cycle,” raising the base rate by 0.25 percentage points in the fourth quarter of this year and again in the fourth quarter of next year. Park said the risk of a more hawkish stance has increased due to cost pressures from higher oil prices. With inflation above target and growth above potential, he said, a gradual adjustment in the policy stance would be justified.

Citi expects two rate hikes within the year. Kim said the risk of prolonged core inflation has increased, and that with accommodative financial conditions and an active role for fiscal policy, there is growing upside risk that the terminal rate could rise higher than expected to 3.25% to 3.50% by the second to third quarter of next year.

Local brokerages also said the likelihood of rate hikes is rising. Kim Myeong-sil, a researcher at iM Securities, said expectations for rate cuts are retreating quickly as the combination of resilient growth and rising prices takes hold, bringing renewed focus on possible tightening. If inflation risks increase further, she said, the policy reaction function could effectively shift toward an asymmetric, hawkish stance.

* This article has been translated by AI.

Sooyoung Jang