South Korea's economy grew more than anticipated in the second quarter, propelled by an artificial intelligence-driven boom in chip exports, a development that supports the case for the central bank to implement further interest rate increases.

Data released by the Bank of Korea on Thursday showed gross domestic product (GDP) expanded by 0.6% in the three months to June, following a 1.8% rise in the first quarter. This reading surpassed the median forecast of 0.4% from economists surveyed.

Although the pace moderated from the first quarter's stellar performance, which was the fastest growth rate since late 2021, the latest figures extend a trend of economic data consistently exceeding expectations. This pattern has already prompted the government, the central bank, and the International Monetary Fund to repeatedly upgrade their growth outlooks for South Korea.

This robust performance will bolster the arguments of central bank officials considering another rate hike in the coming months. The Bank of Korea just last week executed its first interest rate increase since 2023. A recent survey of economists indicates market expectations for another hike before October, with a minority predicting potential action as early as the August 27 policy meeting.

"This stronger-than-expected outcome likely increases the probability of consecutive rate hikes," said Shinyoung Securities Co. fixed-income strategist Cho Yong-gu in a phone interview.

Following the July 16 rate hike, Bank of Korea Governor Shin Hyun-song stated that policymakers would maintain a hawkish stance, citing persistent inflation above target, strengthening economic growth, and accumulating financial stability risks. The central bank also indicated it would "significantly" raise its growth forecast at next month's meeting.

Economists had previously expected second-quarter growth to slow from the start of the year due to spillover effects from the Iran war that erupted in late February. As one of the world's most energy-import-dependent economies, South Korea is highly sensitive to rising oil prices and import costs, which partially offset the gains from the semiconductor boom.

Following the exceptionally strong first quarter, a moderation in GDP growth for the second quarter was widely anticipated, even as the overall growth momentum remained intact. Chip manufacturers have struggled to rapidly expand capacity to meet the explosive demand related to AI, constraining output growth despite strong order books.

"This GDP report will likely put a rate hike on the agenda for the Bank of Korea's August meeting—Governor Shin previously referred to that meeting as 'effective'," said economist Hyosung Kwon. "We previously expected no change, but now our baseline forecast is for a 25-basis-point hike, though we still view it as a close call."

Central bank data showed second-quarter exports grew 1.4% quarter-on-quarter, primarily driven by increased semiconductor shipments, while imports rose 0.8%, supported by growth in automobiles, machinery, and equipment.

Data from the Ministry of Trade shows chip shipments in the first half of the year surged approximately 163% year-on-year, already surpassing the full-year record set in 2025. Computer exports also skyrocketed by 262%.

Officials believe AI-driven chip demand is increasingly spilling over into the broader economy through channels such as improved corporate profits, expanded investment, and increased wages and tax revenue, thereby cushioning the impact of external headwinds. This momentum is also supporting household consumption.

Private consumption grew 0.4% quarter-on-quarter, compared to a 0.6% increase in the prior quarter. Government consumption rose by 2.2%. Equipment investment increased a modest 0.2% this quarter after a 6.6% jump in the previous one, while construction investment declined 0.2% following a 1.4% rise.

Recent data continues to underscore economic resilience: exports are being buoyed by robust chip shipments, and the year-to-date current account surplus has already exceeded the full-year record from 2024. The strength of the recovery is also beginning to feed into prices, with inflation accelerating in June to its fastest pace since late 2023.

"Due to high base effects, stock market corrections, and rising oil prices, the third-quarter sequential growth rate might be the low point for the year," said Cho. "Even so, we still plan to raise our full-year growth forecast to around 3.3%."