Spreading 'S Fear': Rate Hikes Back on the Table [U.S.–Iran War]

The Middle East war has driven up international oil prices and the won–dollar exchange rate at the same time, hitting the South Korean economy with a twin shock of high oil prices and a weak currency. When energy prices rise while the won depreciates, import prices can climb quickly and push up consumer prices across the board.
Experts warn that if the war drags on, mounting stagflation pressures could force the Bank of Korea (BOK) to move up the timing of its next policy rate hike.
The BOK on the 10th conducted an outright purchase of Treasury bonds with maturities of three, five, and ten years, totaling 3 trillion won, to counter the recent surge in market interest rates. Analysts note that such purchases can help cap the upper bound of yields, but have limited power to fundamentally reverse the direction of interest rates.
Ahn Yeha, a researcher at KIWOOM Securities, said, "Outright purchases can restrict the upside in yields, but it is hard to see them as a trigger for a full-fledged downturn in rates." Ahn added, "Given that the 3 trillion won purchase is the largest ever, it should have a short-term stabilizing effect on market rates." Seung-Won Kang, a researcher at NH Investment & Securities, also remarked, "Ultimately, the key variable is oil prices," and continued, "If the spike in oil prices persists, it could push rates higher again, but outright purchases alone are unlikely to create a turning point."
In its economic outlook released in February, the BOK projected this year’s consumer price inflation at 2.2 percent, close to its 2.0 percent target. That forecast assumed an average international oil price of 64 dollars per barrel for the year. At the time, the BOK expected oil to average 65 dollars in the first half and 63 dollars in the second half, explaining that "even if oil prices rise due to heightened tensions in the Middle East, they will gradually decline over the year amid an overall supply surplus."

However, the situation has changed rapidly as geopolitical risks have piled up, including U.S. airstrikes on Iran and the closure of the Strait of Hormuz. On the 8th (local time), West Texas Intermediate crude oil (WTI) futures on the New York Mercantile Exchange (NYMEX) briefly soared to 119 dollars per barrel. Brent crude oil also climbed above 100 dollars before retreating to the 80-dollar range that day, still a high level. Because South Korea relies heavily on Middle Eastern crude, a sharp rise in oil prices can quickly translate into inflationary pressure.
Cho Yong Gu, a researcher at Shinyoung Securities, noted, "With the scenario of a quick end to the war effectively off the table, the timing of U.S. rate cuts is increasingly likely to be pushed back to the fourth quarter or not happen at all." He added, "The Bank of Korea will likely maintain its current hold stance, but as upward pressure on oil prices intensifies, concerns about a shift toward tightening will grow."
Inflation pressure affects not only short-term responses but also the longer-term outlook for monetary policy. Seung-Won Kang commented, "If the spike in prices lasts only about a month, weaker consumption could limit its impact on inflation, but a prolonged surge would be a different story." He went on, "If the war continues until the next Monetary Policy Board meeting next month, conditions could emerge for the BOK to at least consider the option of a rate hike."
The exchange rate is another key factor for interest rates. In the Seoul Foreign Exchange Market that day, the won–dollar rate closed at 1,469.3 won, down 26.2 won from the previous session, but it remains elevated. The previous day’s close was 1,495.5 won, a level comparable to that seen during the Global Financial Crisis (GFC), underscoring extreme volatility. With the twin shocks of high oil prices and a weak won, even the previously dominant view favoring a near-term rate hold is beginning to crack.