SEOUL (Reuters) – South Korea’s state-run think tank on Thursday said there was a need for early cuts in interest rates, as it flagged weaker economic growth and inflation amid sluggish domestic demand.
In its revised economic forecasts, the Korea Development Institute (KDI) said the economy was expected to grow 2.5% in 2024, down from 2.6% seen three months earlier, while keeping its projection for 2025 at 2.1%.
Domestic demand is seen remaining weak and delaying the economic recovery, despite stronger growth in exports, according to the think tank.
“We are seeing high interest rates as the biggest factor behind weak domestic demand and hope that interest rates will be adjusted in the near future,” a KDI official said.
KDI also cut its inflation forecasts to 2.4% in 2024 and 2.0% in 2025, from 2.6% and 2.1% seen previously.
In the second half of this year, consumer inflation is expected to slow to an average of 2.0%, which is the central bank’s medium-term target, KDI said.
KDI often conducts research for the government but rarely gives specific policy suggestions. Market participants tend to regard policy advice from the think tank as the views of the finance ministry.
South Korea’s economy unexpectedly shrank in the second quarter and logged the sharpest contraction since 2022, as slumping consumer spending undermined an export boom.
Last month, the Bank of Korea opened the door for rate cuts after holding interest rates at a 15-year high of 3.50% for the 12th straight meeting, but the board was divided over when to act amid financial stability concerns.
(Reporting by Jihoon Lee; Editing by Chris Reese, Ed Davies)
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