Bank of Korea chief says AI investment sustainability is key downside risk for Korean economy

Bank of Korea Governor Shin Hyun-song said the key question for Korea's economic downside risk is "how long the massive AI investment boom will last." He added that while AI investment is offsetting the shock of the Middle East war and underpinning growth, its sustainability will be the variable that determines the direction of the economy.

Shin made the remarks Wednesday (local time) at the "CNN Global Perspectives" panel discussion in Bangkok, Thailand, in response to a question about whether Korea faces real downside risks despite strong exports.

"We need to look at what the hyperscalers — the large cloud companies — are doing," he said. "Forecasters looking out to 2030 expect more than $1 trillion in investment over the next three to four years." He added that this is "injecting vitality into global trade and ultimately flowing into the Korean economy as well."

Shin said the Korean economy is currently at the intersection of two major forces: the AI boom and the Middle East war. "In terms of the business cycle, the two are pulling in opposite directions, but the AI economy is overwhelming the negative effects of the Middle East war," he said. He noted, however, that from an inflation standpoint — a central concern for any central bank — the two forces are working together to push prices higher. While the Middle East war is driving up prices on the supply side, the AI boom is also adding upward pressure on the demand side.

Asked about Korea's growing polarization — the so-called "K-shaped economy" — Shin acknowledged that it is "quite pronounced in practice." He stressed that "inflation always hits low-income households hardest, which is why we must bring it down — and why running monetary policy properly is more important than anything else." Reining in inflation through tighter monetary policy, he argued, is ultimately the best way to ease the burden on vulnerable groups.

On financial stability, Shin drew on Korea's experience with the Asian financial crisis in the late 1990s. "That experience shaped our approach to macro-financial stability — it is, so to speak, written into our DNA," he said. "We need to be able to rein in leverage and excess before they grow too large." He warned that "acting after excess has already built up is like pricking a bubble, and that is always very dangerous."

Shin also cited the Bank of Korea's Financial Vulnerability Index, saying it is calibrated so that the second quarter of 1997 — just before the Asian financial crisis — equals 100, and that the current reading is around 46, near the long-term average. "Financial stability is a core mandate of the Bank of Korea, so we monitor it constantly," he said.

Shin reaffirmed the Bank of Korea's commitment to its 2 percent inflation target, saying its resolve on price stability remains "unwavering."