Iran Conflict Escalates Prices and Growth Risks, South Korean Central Bank Keeps Interest Rates Unchanged

The Bank of Korea kept its benchmark interest rate unchanged, indicating a cautious stance. The conflict in Iran has caused energy prices to soar, raising both inflation risks and threatening economic growth, making policy prospects more complicated. On Friday, the Bank of Korea maintained the seven-day repo rate at 2.5%, continuing its unchanged stance since July last year. This decision was in line with the expectations of all 18 economists surveyed by the media. The background of this decision is that inflation remains stable and economic growth is resilient. Consumer prices rose 2.2% year-on-year last month, up from 2% in February, and still close to the central bank's target level. In addition, the Bank of Korea raised its economic growth forecast for 2026 in February. The current Middle East conflict poses risks to both inflation and growth. As a major energy importer heavily reliant on Middle East energy imports, Korea faces pressure from rising import costs as international oil and gas prices climb. As most energy trades are priced in US dollars, higher oil prices may also exacerbate pressure on the Korean won's depreciation, further driving up inflation and squeezing domestic demand. This decision on Friday was the last decision made during the tenure of Governor Lee Ju-yeol, whose term as central bank governor will end later this month. During his four-year term, Lee Ju-yeol led a comprehensive monetary policy operation: raising interest rates to suppress high inflation after the end of the COVID-19 pandemic, and then initiating a rate-cutting cycle when growth concerns emerged. His term also strengthened communication with the market.