Seoul: South Korea's central bank maintained its benchmark interest rate at 2.5 percent on Thursday due to ongoing uncertainties in the Middle East. However, it indicated potential future tightening as inflationary pressures and concerns over currency weakness grow.
According to Yonhap News Agency, the Monetary Policy Board of the Bank of Korea (BOK) made the widely anticipated decision during its rate-setting meeting in Seoul. This meeting was the first under BOK Governor Shin Hyun-song, who assumed office last month. Despite being in an easing cycle, the bank has now kept the rate steady for eight consecutive meetings.
The BOK initiated its monetary easing strategy in October 2024, reducing the benchmark rate by 100 basis points from 3.5 percent to stimulate economic growth. It has remained unchanged since July 2025. A BOK statement highlighted uncertainties from the Middle East conflict and emphasized the need to maintain the current rate while evaluating the situation's effects on growth and inflation.
Nevertheless, the BOK noted that a rate hike might be on the horizon, as economic growth continues to improve, driven by robust semiconductor exports and rising consumer prices due to high oil prices. The board plans to decide the timing of any rate hikes based on inflationary pressures, economic recovery, and financial stability.
Five board members supported maintaining the current rate, while two members, Chang Yong-sung and Ryoo Sang-dai, voted to raise it to 2.75 percent. Governor Shin reaffirmed the central bank's hawkish future stance, citing high inflation, steady growth, and foreign exchange volatility as factors necessitating a rate increase.
The Korean won has been declining sharply, hovering around 1,500 won against the U.S. dollar amid the U.S.-Iran conflict. Shin warned against excessive foreign exchange volatility, promising decisive action to counteract one-sided movements.
Simultaneously, the BOK increased South Korea's economic growth forecast for 2026 by 0.6 percentage points to 2.6 percent, crediting strong semiconductor demand. Despite rising commodity prices and supply constraints from the Middle East war, the BOK expects Asia's fourth-largest economy to continue improving, bolstered by exports and a supplementary budget.
Governor Shin projected exports to contribute 0.7 percentage points to growth this year, with additional boosts from government fiscal support and a local stock market rally. He suggested that if the Middle East conflict resolves soon, growth could exceed 2.6 percent, rejecting the notion of a short-lived trend.
Moreover, the BOK revised its inflation forecast to 2.7 percent from 2.2 percent, citing higher international oil prices due to the U.S.-Iran war. The bank highlighted uncertainties concerning global oil prices, exchange rates, and government price stabilization measures affecting inflation's future path. Shin predicted inflation would peak in the second half, with Middle East factors significantly influencing the outcome.
Economic experts had anticipated a policy shift by the central bank as the Middle East conflict impacts Asia's fourth-largest economy, intensifying inflationary pressures and currency volatility. The country's economy grew 1.7 percent in the first quarter, marking the strongest quarterly growth since Q3 2020, while consumer prices rose 2.6 percent in April, driven by increased fuel costs and robust semiconductor exports.
Earlier this month, BOK Senior Deputy Governor Yoo Sang-dai indicated that higher oil prices might further elevate inflation in May, despite price stabilization measures, and suggested considering a rate hike given the country's robust first-quarter economic performance.