Bank of Korea Governor Signals Potential Interest Rate Hike

Although the conflict in the Middle East has effectively concluded, the Bank of Korea appears poised to maintain its stance on interest rate hikes. This is due to the likelihood that the surge in consumer prices, primarily driven by oil, which was triggered by the high oil prices resulting from the war, could spread to other sectors, despite a decline in international oil prices following the cessation of hostilities.

August Brent crude futures settled down 4.76% from the previous trading day at $83.17 a barrel on the London ICE Futures Exchange. West Texas Intermediate (WTI) crude futures for July delivery closed at $80.75 a barrel on the New York Mercantile Exchange, down 4.86% from the previous session. This was the lowest level in three months since March 10, early in the Middle Eastern conflict. The drop in international oil prices reflected news of the Middle East war's end.

Restoring and normalizing the supply chain, which was damaged by the conflict, is expected to take considerable time. Fatih Birol, Executive Director of the International Energy Agency (IEA), stated that it would take at least two years to restore regional energy supply to pre-crisis levels. Although the United States and Iran have agreed to gradually open the Strait of Hormuz without toll fees for 60 days, issues regarding toll collection reportedly remain afterwards. This has created an environment where it is difficult to rule out the possibility of oil prices remaining at levels higher than before the war, or even rising further.

Consumer prices rose 3.1% year-on-year in May, reaching their highest point in 22 months. Following the outbreak of the Middle East conflict, the pace of increase grew to 2.2% and 2.6% in March and April, respectively, before climbing into the 3% range last month. The impact of high oil prices appears to be expanding from supply-side shocks, such as rising personal service prices, into demand-side price pressures. Im Jae-gyun, a researcher at KB Securities, analyzed that unless international oil prices fall to $65 a barrel, price increases for petroleum products in the second half of this year will exert upward pressure on inflation.

Factors such as robust export growth, led by semiconductors, are easing the burden of growth deceleration that could result from a base rate increase. The real Gross Domestic Product (GDP) growth rate for the first quarter of this year was 1.8% compared to the previous quarter, an upward revision of 0.1 percentage points from the preliminary estimate of 1.7%. This indicates that the economy is growing more robustly than expected. Bank of Korea Governor Shin Hyun-song stated in his founding anniversary speech on the 12th that "it is necessary to raise interest rates without delay, with a focus on price stability." He added that the Bank of Korea would raise interest rates as price inflation is expected to rise due to base effects until August.