Lee Hyo-jin covers the Bank of Korea, the banking industry and broader financial news. Her previous beats include foreign affairs, North Korea and general reporting on Korean society.
US-Iran peace deal unlikely to cool BOK's rate-hike bets
Bank of Korea (BOK) Gov. Shin Hyun-song speaks during the BOK International Conference at the bank's headquarters in Seoul, June 1. Yonhap
By Lee Hyo-jin
A tentative ceasefire agreement between the United States and Iran has fueled hopes of lower oil prices, but expectations for a Bank of Korea (BOK) rate hike remain largely unchanged as inflation risks persist, analysts said Tuesday.
The BOK has maintained a hawkish tone in recent months, citing inflationary pressures fueled by the Iran conflict.
The U.S.-Iran ceasefire agreement, announced Monday and expected to include plans to reopen the Strait of Hormuz, has eased immediate concerns over energy supply disruptions in the Middle East.
Analysts cautioned, however, that the implications for Korea's inflation outlook remain uncertain and will require closer monitoring in the coming months.
Even if shipping through the key waterway returns to normal, damaged energy infrastructure in the Middle East could take time to recover, and global supply chains may not immediately return to pre-Iran war conditions, they said.
Analysts also noted that changes in oil prices typically take time to feed through to consumer inflation, meaning any easing in price pressures is unlikely to be immediate.
Joo Won, head of research at Hyundai Research Institute, said expectations for a rate hike are likely to persist despite easing oil prices.
"Even if oil prices stabilize, the impact of previously elevated energy costs is likely to feed through to consumer prices with a lag. As a result, the case for a BOK rate hike is likely to remain intact," he said.
Vessels sitting in the Strait of Hormuz are seen from Musandam, Oman, Monday. Reuters-Yonhap
The central bank left its benchmark interest rate unchanged at 2.5 percent in May, extending its pause for an eighth consecutive meeting, but signaled the start of a rate hike cycle.
BOK Gov. Shin Hyun-song reinforced that message at the bank's May 28 rate-setting meeting, saying the policy path remained "relatively clear" given inflation, economic growth, exchange rate movements and housing prices.
Markets widely expect the BOK to raise rates by 0.25 percentage points at its next policy meeting on July 16, as inflation remains elevated. Consumer inflation accelerated to 3.1 percent in May, the highest level in more than two years, as petroleum prices surged 24.2 percent from a year earlier, according to central bank data.
Beyond developments in the Middle East, market participants are also closely watching the upcoming U.S. Federal Reserve meeting for clues about the BOK's policy path.
The meeting, scheduled for Wednesday (local time), will mark the first policy decision under Fed Chair Kevin Warsh.
A more hawkish Fed could add to pressure on the BOK. Higher U.S. interest rates tend to strengthen the dollar and increase the risk of capital outflows, putting downward pressure on the Korean won.
"If the Fed adopts a more hawkish stance than markets expect, the BOK will face growing pressure to raise interest rates at its July meeting," said Kang Sung-jin, a professor of economics at Korea University.