Seoul: Market interest rates could face significant upward pressure if the conflict in the Middle East persists amid rising inflationary pressures and growing concerns about global monetary tightening, the central bank said Thursday. The Bank of Korea (BOK) issued the warning in its latest financial stability report, as U.S.-Israeli strikes on Iran that began late last month have escalated into a broader regional conflict.
According to Yonhap News Agency, the BOK highlighted that ongoing tensions in the Middle East could drive market interest rates upward due to increased oil prices, which would intensify supply-side inflationary pressures and elevate concerns about global monetary tightening. The report emphasized that disruptions in the energy supply chain could lead to higher international energy prices, impacting both inflation and economic growth. Notably, the effective closure of the Strait of Hormuz has already driven global oil prices higher, disrupting international supplies. South Korea, which relies heavily on imports for its fossil fuels, obtains approximately 70 percent of its crude oil from the Middle East, as per industry and government data.
The report further indicated that if Middle East tensions persist, foreign investors' preference for safe-haven assets would likely continue, potentially limiting any easing of volatility in stock prices and exchange rates. The Korean won has weakened significantly against other major currencies amid risk-aversion sentiment and broad dollar strength.
The BOK also warned that a prolonged crisis could have adverse effects on corporations, with higher energy costs potentially reducing profitability and weakening debt repayment capacity for vulnerable firms. The central bank stressed the importance of enhancing monitoring and risk management of foreign exchange and financial markets, as well as vulnerable sectors, given the heightened uncertainty surrounding the conflict. It urged authorities to strengthen coordination to implement timely market stabilization measures if necessary.
At its latest rate-setting meeting in February, the BOK kept its benchmark interest rate steady at 2.5 percent, marking the sixth consecutive hold. Analysts anticipate that the central bank will maintain a prolonged pause to support financial stability.