Bank of Korea may turn cautiously hawkish, while the AI semiconductor surplus provides a buffer for bonds and the won

Overview

This report previews the Bank of Korea's May MPC meeting. Goldman Sachs believes that, against the backdrop of Middle East energy supply disruptions, renewed increases in Seoul housing prices, and stronger-than-expected first-quarter GDP, the Bank of Korea will shift from a neutral stance to a more hawkish one, but will not tighten aggressively. The core reasons are that the duration of the energy shock remains uncertain, inflation expectations are still contained, and Korea's recovery is mainly driven by technology and semiconductors, while domestic demand, non-tech output, and the labor market remain weak.

Core views

First, the Bank of Korea is likely to raise its 2026 growth forecast from 1.9% to near the 2.5% market consensus, but not materially above 2.5%, because technology accounts for only about 10% of GDP and less than 1% of employment, leaving the recovery base narrow. Second, the 2026 CPI forecast will be revised slightly upward from 2.3%, with energy as the main driver, but weak non-tech demand and slowing wages will limit second-round inflation. Third, Seoul housing prices have risen again since mid-March, increasing concerns about overheating in real estate. Fourth, although global yields and concerns about fiscal expansion have pushed up Korea's long-end yields, the current account and tax 'super surplus' generated by AI semiconductors can buffer pressure on bonds and the exchange rate. Fifth, Goldman Sachs maintains its forecast of 25bp hikes in July and October of 2H 2026, with a 3.00% policy rate by end-2026.

Analysis framework

The report uses a macro policy preview framework, breaking the Bank of Korea's reaction function into five dimensions: growth, inflation, real estate financial stability, fiscal space, and FX and fund flows. It also distinguishes between the technology/semiconductor cycle and the non-tech economy to judge whether the central bank needs to tighten more than market pricing implies.

Methodology notes

• Macro policy analysisCentral bank reaction function

  Growth, inflation, asset prices, and expectation management jointly determine the policy tone and rate path.

  The report believes the Bank of Korea will turn more hawkish because of inflation and housing price risks, but policy guidance should remain restrained because underlying inflation and the non-tech economy are still weak.

• Cross-asset macro analysisCurrent account and fiscal buffer framework

  Semiconductor strength affects bonds and the won through corporate earnings, tax revenue, the current account, and FX supply and demand.

  The AI semiconductor cycle may boost tax revenue and local KRW demand, offsetting pressure on Korean assets from overseas outflows and rising global yields.

• Scenario risk analysisEnergy shock and fiscal deployment scenarios

  The path of energy prices and the use of excess tax revenue are the main swing factors in policy rate forecasts.

  If Middle East energy disruptions persist or fiscal policy expands procyclically, the Bank of Korea may hike more than twice; if the energy market stabilizes and fiscal savings increase, room for further hawkish repricing declines.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Korean policy rate

  Direct mapping to the central bank reaction function and inflation risk

  Strengths

  Economic growth and rebounding housing prices support a more hawkish tone.

  Weaknesses

  Non-tech sectors remain weak, wage growth is slowing, and inflation expectations are contained.

  Comparison

  Goldman Sachs forecasts 3.00% by end-2026, materially below market pricing of about 4.25%.

  Risks

  A prolonged energy shock or procyclical fiscal expansion could lead to more rate hikes.

• Korean Treasury Bonds (KTBs)

  Driven jointly by the policy rate, global yields, WGBI fund flows, and the fiscal balance

  Strengths

  WGBI inclusion, higher tax revenue, and fiscal buffers are favorable for bond demand and deficit narrowing.

  Weaknesses

  The 10-year yield has already risen above 4.2%, with the long end dragged by global yields and inflation concerns.

  Comparison

  The report believes the market rate path is more hawkish than Goldman Sachs' baseline.

  Risks

  Long-end volatility, duration adjustments by insurers, and fiscal expansion may continue to push yields higher.

• Korean won (KRW)

  Driven jointly by fund flows, the current account, semiconductor tax payments, and foreign holdings

  Strengths

  Current account improvement, local expansion by memory companies, and tax payments can increase KRW demand.

  Weaknesses

  Foreign equity outflows and previous overseas allocation by local investors had weighed on the won.

  Comparison

  The report believes future current account improvement will matter more than recent financial outflows.

  Risks

  If foreign investors continue concentrated selling of Korean semiconductor stocks or global risk aversion rises, the won may remain under pressure.

• Korean semiconductors and the AI cycle

  A key transmission source for macro fiscal, FX, and growth dynamics

  Strengths

  Strong semiconductor exports and profits may significantly lift tax revenue and the current account.

  Weaknesses

  The industry is capital-intensive, with a low employment share, providing limited support to broad wages and domestic demand.

  Comparison

  There is a clear divergence between strength in the tech sector and weakness in non-tech sectors.

  Risks

  If semiconductor profits fall short of expectations, the fiscal and FX buffer will be weaker than the report's baseline.

Key data

• Bank of Korea 2026 growth forecastraised from 1.9% to near the 2.5% consensusFirst-quarter GDP beat expectations, but the recovery is still led by the tech sector.
• Bank of Korea 2026 CPI forecastslightly revised up from 2.3%Energy prices are the main driver, but inflation expectations and non-tech demand remain contained.
• April headline CPI2.6% YoYMainly driven by oil-related goods and services.
• 1-year inflation expectations2.8%, down 10bpThe Bank of Korea's May survey shows inflation expectations remain anchored.
• Medium-term inflation expectations2.6%Unchanged from the previous period.
• Tech sector share of the economyabout 10% of GDP and about 1% or slightly less of employmentThis limits the spillover of the semiconductor boom into the broader economy and wage inflation.
• Goldman Sachs policy rate forecast3.00% by end-2026Assumes 25bp hikes in July and October 2026.
• Market pricingrising to about 4.25% over the next 12 monthsGoldman Sachs views this pricing as relatively aggressive.
• Estimated 2026 tax provisions of the two major chip companiesup to KRW150trn, versus KRW12trn in 2025Most of this is likely to be paid domestically in Korea.
• Estimated medium-term excess tax receipts by end-Augustabout KRW60trn; KRW85trn including the portion already incorporated in the supplementary budgetEnough to cover the planned KRW52.7trn general government consolidated budget deficit for 2026.
• Estimated WGBI-related fund flowscumulative about KRW55trn in 2026Supports demand for Korean bonds.
• May foreign equity outflowsabout US$30bnThe report describes this as a record high and says it pushed USDKRW back above 1,500.
• KRW demand related to local expansion of overseas production capacityabout US$80bnDriven by local capacity expansion and tax payment needs of memory companies.

Impact & implications

In terms of investment implications, the report is not simply bearish on Korean bonds or the won. In the short term, the energy shock, rising global yields, concerns about overheating in real estate, and fears of fiscal expansion may push yields higher and weigh on the won; but in the medium term, corporate earnings, tax revenue, current account improvement, and WGBI fund flows driven by AI semiconductors may buffer the fiscal deficit and FX imbalance. Goldman Sachs believes the market expectation for the Bank of Korea to hike rates to 4.25% is too aggressive; if energy prices stabilize and fiscal savings increase, upside in Korean rates may be limited.

Risks

• If Middle East energy supply disruptions persist beyond June, inflation could rise further and force the Bank of Korea to hike more than twice.
• Continued increases in Seoul housing prices could intensify concerns about overheating in real estate and financial stability.
• If the government uses AI-driven excess tax revenue for procyclical fiscal expansion, inflation pressure may increase.
• Rising global yields, long-end volatility, and duration adjustments by insurers may continue to push KTB yields higher.
• If foreign investors continue concentrated selling of Korean semiconductor stocks, the won and equity fund flows may come under pressure.
• If the non-tech economy remains weak, upward growth revisions may fail to translate into a broader recovery in domestic demand.

What to watch

• Whether the Bank of Korea's May MPC statement explicitly shifts from neutral to hawkish.
• Whether the 2026 GDP forecast is raised from 1.9% to near 2.5%, and whether the wording acknowledges the narrow recovery base.
• The magnitude of the upward revision to the 2026 CPI forecast, price changes in oil-sensitive categories, and inflation expectation trends.
• Housing prices in Seoul and other major metropolitan areas, the July real estate tax package, and anti-speculation measures.
• Whether Middle East energy supply disruptions ease before the end of June.
• August mid-term tax payments by semiconductor companies and whether excess tax revenue is saved or used for fiscal expansion.
• Whether WGBI-related inflows, foreign equity outflows, and USDKRW continue to show high volatility.
• Korea's 10-year and 30-year KTB yields, as well as insurers' adjustments to long-duration positions.