Taming Inflation or Supporting Growth? Market Expects Key Rate to Stay at 2.5%

Geopolitical risks stemming from the Middle East, rising international oil prices, and a weak won are shrouding the Bank of Korea (BOK)'s policy path in uncertainty. External factors that push prices higher are expanding at the same time, making interest rate decisions more uncertain. Even if the conflict eases quickly, the impact of high oil prices and a weak currency is likely to feed through with a lag, so upward pressure on inflation is expected to persist for the time being.
■ Focus on a rate hold, and on the policy 'message'
The BOK will set its policy rate at a Monetary Policy Board meeting on the 10th. It will be the last meeting chaired by Governor Lee Chang-yong before his term ends. Markets largely expect the central bank to keep the base rate unchanged at 2.50%. Although inflationary pressure remains to the upside, concerns about an economic slowdown are also mounting, making a hasty policy shift difficult.
More than the level of the rate itself, the policy message about the future direction has become the key variable. Investors are likely to focus on how strongly the BOK describes the outlook for inflation and interest rates, and on any change in tone.
Experts believe the inflation shock has already begun. Baek Yoon-min, a researcher at Kyobo Securities, said, "The March inflation rate of 2.2% partly reflects the impact of oil price stabilization measures and the oil price cap," adding, "With oil above 100 dollars, the inflation shock is bound to show up with a time lag. The extent of that shock will depend on government policy and market conditions." If a weak won and high oil prices occur together, he explained, the resulting rise in import prices could keep upward pressure on overall inflation.
On the possibility of stagflation, Baek assessed, "We are seeing some price increases, but the slowdown in domestic growth is mainly due to export factors," and added, "There is a risk of weaker consumption, but the impact on exports and overall growth is limited, so for now it remains a concern rather than a full-blown risk."
Park Sang-hyun, a researcher at iM Securities, also noted, "The inflationary impact from the Middle East is likely to become more pronounced from next month," but judged, "Unless the Strait of Hormuz is blocked for at least three to six months, it is unlikely to lead to a full-scale recession, and current stagflation risks are limited."
■ Inflation or growth? The BOK's dilemma
The problem is that inflation and growth are sending conflicting signals. Inflation is facing stronger upward pressure from higher oil prices and a weaker currency, while the economy is seeing greater downside risks from slowing consumption and uncertain external demand. This combination narrows the range of options available for monetary policy.
Most analysts say inflation should take priority in the policy response. Inflation driven by supply shocks such as higher oil prices is harder to tackle with monetary policy alone, but if inflation expectations become entrenched, the cost of restoring price stability can grow much larger. If high inflation persists, some observers say a rate hike within the year cannot be ruled out.
As uncertainty grows, the BOK's forward guidance is also expected to become more cautious and flexible than before. Baek said, "Rather than immediately shifting policy just because inflation is high, the BOK will likely look at both the persistence of high inflation and how external risks are unfolding," and added, "Depending on how conditions evolve, it will need to keep the possibility of a rate hike within the year on the table."
imne@fnnews.com Hong Ye-ji Reporter