Producer price shock adds pressure on BOK for rate hike

Bank of Korea Gov. Shin Hyun-song delivers an address during an appointment ceremony at the BOK annex in Seoul, April 21. Joint Press Corps

Korea's producer prices rose at the fastest monthly pace in more than 28 years in April, adding pressure on the Bank of Korea (BOK) to consider a rate hike later this year as inflation risks mount, analysts said Thursday.

The producer price index, a key gauge of future inflation trends, climbed 2.5 percent from a month earlier in April, according to preliminary data released by the central bank.

The increase marked the steepest monthly rise since February 1998, when producer prices jumped 2.5 percent during the Asian financial crisis.

On a yearly basis, producer prices rose 6.9 percent in April, marking the sharpest increase since October 2022.

The surge was driven largely by rising fuel and raw material costs linked to the ongoing Middle East conflict, the central bank said.

"As the Middle East conflict continues, supply disruptions and rising raw material prices are expected to spread across various sectors with a time lag, putting upward pressure on producer prices and eventually consumer inflation as well," Lee Moon-hee, head of the BOK's price statistics team, said during a briefing.

The sharp rise in producer prices has fueled expectations that the BOK will maintain a hawkish tone at its Monetary Policy Board meeting scheduled for May 28, while keeping the door open to a possible rate hike later this year.

The central bank held its benchmark interest rate steady at 2.5 percent in April.

But mounting inflationary pressure and heightened geopolitical uncertainty stemming from the Iran war are increasingly complicating the outlook for further monetary easing, market watchers said.

Korea Investment & Securities forecast that the central bank would keep its benchmark rate unchanged at the upcoming policy meeting, though it expects at least one board member to issue a dissenting opinion favoring a rate hike.

"We see the base scenario as the BOK signaling the possibility of a rate hike in the third quarter, while presenting a dissenting opinion at the upcoming meeting," analyst Choi Ji-wook said in a report issued Thursday.

On Tuesday, Citibank said in a report that it expects the BOK to "deliver an evidently hawkish hold decision" at the upcoming policy rate meeting.

"In our alternative case, if the Strait of Hormuz unexpectedly reopens before the meeting, the BOK could deliver a hawkish 25-basis-point rate hike to 2.75 percent,” the report added, noting that the reopening of the key waterway would partially ease downside risks tied to oil supply disruptions and slowing economic growth.