Bank of Korea sees semiconductor upcycle continuing, warns of risks

The Bank of Korea (BOK) forecasts that the global semiconductor market's expansionary trend will persist through next year, largely fueled by significant investments in artificial intelligence and related infrastructure. The central bank highlighted that the increasing demand for processing power, driven by widespread AI adoption, coupled with the inherent complexities and slow expansion of chip production capacity, will sustain the semiconductor upcycle.

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The semiconductor cycle is projected to remain expansionary because of increasing investment in areas of AI usage (agentic, physical AI, etc.) and related infrastructure.

In a report submitted to the National Assembly, the BOK stated, "The semiconductor cycle is projected to remain expansionary because of increasing investment in areas of AI usage (agentic, physical AI, etc.) and related infrastructure." Leading forecasters also support this outlook, anticipating the upcycle to continue globally.

However, the BOK also pointed to several latent risks that could disrupt this positive trajectory. These include potential energy bottlenecks, a possible investment pullback by major tech firms, and a market correction stemming from concerns about the profitability of AI technologies. Furthermore, the central bank noted that the benefits of the current semiconductor boom are concentrated in specific industries and demographic segments, suggesting it may take time for these advantages to permeate the broader economy.

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The upcycle in the global semiconductor market will continue through next year.

In parallel, the BOK reiterated its stance on monetary policy, emphasizing the need for higher interest rates. Citing recent shifts in economic conditions, including rising inflation, stronger growth, and financial instability, the bank indicated that the base rate should be increased at an appropriate time. Financial observers anticipate a rate hike from the current 2.50% to 2.75% at the Monetary Policy Board's next meeting on July 16.

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The won-to-dollar exchange rate has risen along with other major currencies as investors grow risk-averse because of instability in the Middle East, but the won has depreciated more than other major currencies because of a stock selloff by foreign investors.

The BOK also addressed recent volatility in the foreign exchange and stock markets. It noted that the won-to-dollar exchange rate has risen due to investor risk aversion amid Middle East instability, with the won depreciating more than other major currencies due to foreign investor stock selloffs. The bank pledged to continue market stabilization measures, including plans for round-the-clock currency trading and a system for processing overseas won-denominated payments. Regarding stock market volatility, the BOK attributed it to simultaneous upward and downward pressures, including concentrated demand in semiconductor stocks, uncertainty over US monetary policy, and AI profitability concerns.

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Market volatility has increased significantly because stocks are simultaneously facing greater upward and downward pressure.