While accommodative policies will help in the near term, longer-term challenges include weak productivity, a shrinking labour force and high household debt
[SEOUL] South Korea should maintain its accommodative fiscal and monetary policy settings to support the economic recovery, the International Monetary Fund (IMF) said, warning that structural reforms are also essential to lift the nation’s longer-term growth prospects.
In a regular assessment released on Wednesday (Sep 24) in Seoul, the IMF said that authorities have sufficient policy space to stimulate the economy, though the mix should remain agile and adapt to evolving external risks. It added that foreign-exchange intervention should stay limited to prevent disorderly market conditions.
“With inflation expectations well-anchored and risks to inflation broadly balanced, monetary easing will help bolster the growth recovery,” said Rahul Anand, IMF mission chief for Korea. “However, monetary policy should remain agile and adjust to the evolving outlook and risks, given persistent external uncertainties.”
The IMF’s Article IV statement comes as speculation mounts over the possibility that the Bank of Korea (BOK) may resume its easing cycle when it next sets policy on Oct 23. A BOK board member acknowledged on Tuesday that another rate reduction this year would make sense, while hedging on whether the move should come in October or November. At the August meeting, five of six board members said that they were open to a rate reduction in the next three months.
The IMF said that the government’s near-term fiscal stance and spending priorities in the 2026 budget proposal are appropriate, while fiscal consolidation should resume once growth converges towards its potential rate to create room for long-term age-related spending pressures. Proactive measures to curb household loan growth and resolve troubled real estate project financing exposures have been effective in containing financial vulnerabilities, it added.
The IMF projects South Korea’s economy will expand 0.9 per cent this year before rebounding to 1.8 per cent in 2026, aided by more supportive policies and resilient semiconductor exports. Inflation is forecast to stay near the central bank’s 2 per cent target over the period, it said.
Still, the fund noted a high degree of uncertainty, with risks tilted to the downside. While accommodative policies will help in the near term, longer-term challenges include weak productivity, a shrinking labour force and high household debt.
The IMF welcomed the government’s new Economic Growth Strategy focused on artificial intelligence adoption, service exports and innovation, but said reforms must be accelerated. It also recommended structural fiscal changes, such as pension reform and a credible medium-term fiscal anchor to meet rising age-related spending pressures. BLOOMBERG
