South Korea-US long-term interest rate gap narrows to 3-year low

The interest rate differential between South Korea and the United States has shrunk to its narrowest in nearly three years, driven by anticipation of a Bank of Korea rate increase and a brighter economic forecast for South Korea.

As of last month, South Korea's 10-year government bond yield stood at 4.18%, just 0.29 percentage points lower than the U.S. 10-year yield of 4.47%. This marks the smallest gap since July 2023. The Bank of Korea's benchmark rate is currently 2.50%, significantly lower than the U.S. rate of 3.50-3.75%.

Financial markets widely expect the Bank of Korea to raise its key interest rate at its upcoming Monetary Policy Committee meeting and potentially implement another hike by year-end. While U.S. rate cut expectations have diminished due to inflation concerns, the outlook for further U.S. rate increases or freezes remains divided.

This narrowing gap is also influenced by South Korea's robust economic performance, particularly driven by strong semiconductor exports. The International Monetary Fund recently revised South Korea's GDP growth forecast for this year to 2.6%, the highest among developed economies, surpassing even the U.S. projection of 2.3%. The government has set an even more optimistic target of 3.0% growth for the year.