Chip export slowdown could trigger BOK rate cuts in H2 2027: Citi

The Bank of Korea (BOK)’s interest rate path could diverge significantly depending on whether the semiconductor export boom continues, according to an analysis released Monday.

In a report, global investment bank Citigroup Inc. said the BOK would raise its benchmark interest rate by 0.25 percentage point each in November this year and February next year, bringing it to 3.5 percent from the current 3 percent, if the semiconductor export boom persists.

If semiconductor exports fall short of expectations and turn negative due to declining memory chip prices, however, the BOK could end its rate-hiking cycle early and begin gradually cutting rates in the second half of next year, eventually lowering the benchmark rate to 2.5 percent by 2028, Citi said.

“If memory chip spot prices and exports decline unexpectedly between the fourth quarter of this year and the first quarter of next year, the BOK could halt further rate hikes after raising its benchmark rate to 3.25 percent this month,” said Citi Economist Kim Jin-wook, identifying the semiconductor industry as a key factor shaping monetary policy.

Citi projected that South Korea’s semiconductor exports would surge 203 percent this year, far exceeding last year’s 22 percent growth, before expanding another 53 percent next year and 21 percent in 2028.

The prolonged semiconductor boom is expected to keep economic growth above the country’s potential growth rate for three consecutive years, reaching 3.8 percent this year, 3.3 percent next year, and 3 percent in 2028.

Citi also estimated that the country’s current account surplus would average 23 percent of gross domestic product (GDP) over the same period.

In a downside scenario in which semiconductor price declines outpace growth in export volumes, chip exports would contract 2 percent next year and 14 percent in 2028, Citi forecast.

Under this scenario, economic growth would slow to 2.6 percent next year and 1.5 percent in 2028, respectively 0.7 percentage point and 1.5 percentage points below Citi’s previous forecasts.

For now, strong semiconductor exports continue to drive increases in both export volumes and values.

According to the BOK, the semiconductor export volume index rose 27.5 percent to 292.59 in September from 229.5 in August. The export value index also climbed 29.4 percent to 733.03 from 566.39 over the same period.

Citi further predicted that a downturn in semiconductor exports would ease demand-side inflationary pressures, causing core inflation to slow sharply from the second half of next year.

Core inflation could fall to around 2 percent by the end of next year, the report said.