Chips "make wealth" ignite inflation pressure, future assets: South Korea Central Bank is expected to raise interest rates at least three times in the next year, and the 10-year government bond yield is expected to break 4%.

Future Asset Management (Mirae Asset Global Investments) stated that the enormous wealth created by South Korean chip manufacturers will drive spending and inflation, prompting the South Korean central bank to raise interest rates at least three times in the next year. Choi Jinyoung, the company's fixed income manager and director general, said in an interview on Tuesday that employee bonuses at chip companies, high chip prices, and a booming stock market are likely to keep prices under pressure and push the policy rate of the Bank of Korea from the current 2.5% to a maximum of 3.5% by the second half of 2027. He added that South Korea's 10-year government bond yield is expected to break through the 4% threshold in the next two months for the first time since 2023. Samsung Electronics Co., which reported an eight-fold increase in profits this month, far exceeding expectations, highlights strong demand for AI memory chips despite the turmoil in the Middle East. SK Hynix Inc.'s quarterly profit also increased fivefold. Choi said, "With Samsung and SK Hynix employees receiving these bonuses, where else can they spend the money?" Future Asset Management has assets under management of approximately 33.9 trillion Korean won (approximately $228.4 billion) and is one of South Korea's largest asset management companies. Choi himself manages around 9 trillion Korean won in bonds for the company. Choi's views are more hawkish than many market observers, stemming from the rapid and profound impact of AI on the South Korean economy. Additionally, the oil shock caused by the Iran war further exacerbates inflation risks, potentially forcing the Bank of Korea to maintain a tight monetary policy. Choi believes that oil prices are unlikely to fall. Even if the Iran war ends, supply chain disruptions will keep oil prices high. Based on current price dynamics, Choi holds a bearish view on South Korean bonds, advising investors to avoid "fragile" 5 to 10-year bonds. Instead, he is bullish on short-term corporate bonds of less than two years, as some of these bonds with over 4% yields have already factored in the imminent interest rate hike cycle by the Bank of Korea. His hawkish forecast contrasts with the views of several institutions: JPMorgan expects only one rate hike by mid-2027, Citigroup expects at least two, and Hyundai Bank does not expect any rate hikes this year. "Impactful" Choi believes that the background of the new Bank of Korea Governor Shin Hyun Song may also influence policy direction. Shin Hyun Song has extensive international financial and policy-making experience, "has long been concerned about exchange rate fluctuations, and is more likely than his predecessor to consider the Korean won exchange rate in interest rate decisions." Shin Hyun Song will chair his first monetary policy meeting on May 28th. As Shin Hyun Song takes office, the overall South Korean economy is heating up. GDP for the first quarter even exceeded the most optimistic expectations. Choi said this will impact inflation. "Economic growth expectations are being revised upward." While the Bank of Korea expects GDP growth of around 2%, Choi believes that growth above 3% is possible. Construction investment in the first quarter grew by 2.8% compared to the previous quarter, a trend that Choi believes is particularly worth noting. "This industry has a significant impact on domestic demand."