SEOUL -- South Korea's central bank on Thursday upgraded its economic growth forecast for this year to 4%, reflecting a speedy recovery in exports and corporate investment as well as improvements in private consumption and employment.

The new forecast is in line with a target set by President Moon Jae-in earlier this month, and would be the economy's fastest pace of expansion since the 6.8% jump logged for 2010.

The Bank of Korea's monetary policy board, however, kept its key rate unchanged the same day, at a record-low 0.5%. The bank said it would maintain an accommodative approach for now due to persistent uncertainty surrounding the COVID-19 pandemic and vaccine rollouts.

"The domestic economy is recovering faster than expected since our economic forecast in February, thanks to strong growth in the global economy," BOK Gov. Lee Ju-yeol told reporters. "Considering this change, we predict that this year's economic growth will reach 4%, much higher than the previous forecast."

In February, the BOK had projected that the South Korean economy would expand 3% in 2021. On Thursday, the central bank also raised its inflation forecast for this year to 1.8%.

Bank of Korea Gov. Lee Ju-yeol in a file photo: He said the central bank is "preparing thoroughly" to normalize its policy.   © Reuters

The improved outlook comes as the country's exporters enjoy high demand for semiconductors and cars. South Korea's exports jumped 41.1% on the year to $51.2 billion in April, marking the highest increase in 10 years.

Corporate investment in facilities also increased 6.6% in the first quarter, from the previous quarter, supporting the strong recovery in gross domestic product. Earlier this month, the country revealed a 510 trillion won ($456 billion) plan to strengthen the chip sector by 2030 and, as Moon put it, become a "semiconductor powerhouse."

Despite the brighter picture, South Korea's benchmark Kospi index slipped as much as 0.61% in morning trading, with investors apparently sensing that the days of loose monetary policy might be numbered.

Gov. Lee stressed the BOK would maintain its easy stance for a while longer, but also vowed not to miss the right timing to normalize the benchmark interest rate.

"We will not hurry, but we will not be late either," he said of the eventual shift in policy. "We are preparing thoroughly for this because it is important to adjust it" in an orderly way.

Economists say that the central bank is likely to start raising rates from January next year.

"We expect BOK to start its gradual hiking cycle in January 2022," said Kim Jin-wook, an economist at Citi Research. "In our base case, we may see evident hawkish signals from the monetary policy board meetings in October-November, likely leading to a rate hike in January 2022."

Kim said there would be several factors pushing the central bank in that direction. "This would be due to herd immunity formation in the fourth quarter, higher demand-side inflation as well as increasing concerns on domestic financial imbalances."