Surge in South Korean Consumer Sentiment Signals Rate Cut Delay

In June 2025, South Korea's consumer sentiment saw a significant rebound, with the Composite Consumer Sentiment Index (CSI) rising to 108.7, up from 101.8 in May, according to data from the Bank of Korea (BoK). This uptick in confidence has led analysts to predict that the central bank will postpone any interest rate cuts until at least the fourth quarter of the year. Factors contributing to this renewed optimism include a return to policy normalcy following recent economic turmoil, gains in asset markets, and fresh fiscal stimulus measures.

The CSI, which remained above the neutral level of 100 for the second consecutive month, reflects a notable recovery from a low of 88.2 recorded in December 2024. All six sub-indices of the CSI showed significant improvement, particularly the outlook on domestic economic prospects, which climbed by 16 points in June. Furthermore, the indicators for household income and spending plans have also posted increases for three consecutive months.

Housing price expectations, a reliable indicator of future economic trends, have risen for four consecutive months, suggesting an ongoing recovery in the property market. According to data compiled by CEIC, property prices have surged recently, paralleled by an acceleration in household debt as consumers prepare for new debt service ratio (DSR) measures set to take effect in July.

Min Joo Kang, Senior Economist for South Korea and Japan at ING, stated, "The recent data releases support a recovery from the current quarter. The sentiment index has improved significantly, and high-frequency indicators such as credit card usage and mobility data indicate a modest pickup in economic activity."

Despite this recovery, challenges remain. Early June exports showed a strong rebound, although analysts caution that this may be a temporary effect due to front-loading ahead of the expiration of reciprocal tariff delays in early July. As a result, underlying export strength is expected to remain weak, posing a potential drag on the economy for the remainder of the year.

In light of these developments, the Bank of Korea is anticipated to revise its GDP growth forecast from 0.8% to over 1.0% during its August meeting. However, concerns persist regarding the rising household debt and housing prices, which the BoK has communicated openly. This situation reinforces the argument for a cautious approach to monetary policy, leading ING’s economists to project a 25 basis point rate cut in the fourth quarter of 2025 and the first quarter of 2026, lowering the terminal rate to 2.0%.

As consumer sentiment appears to strengthen, the implications for South Korea’s economic outlook remain complex, with both positive signs of recovery and significant potential risks ahead. The BoK’s wait-and-see stance will be pivotal as it navigates these challenges in the coming months.