SEOUL, April 10 (AJP) — The Bank of Korea on Friday kept its benchmark interest rate unchanged at 2.5 percent as widely expected, caught between rising import-driven inflation and a slowing economy amid prolonged disruptions from Middle East conflicts.
The policy decision reflects a growing dilemma for the central bank, as energy supply constraints tied to the Gulf tensions continue to feed price pressures while weighing on growth.
Consumer prices rose 2.2 percent in March from a year earlier, accelerating from 2.0 percent in the previous two months. While still within the central bank’s target range, the composition points to mounting underlying pressure.
Energy has re-emerged as the dominant driver, amplified by a structurally weaker Korean won, with the full pass-through yet to be realized.
Petroleum prices jumped 9.9 percent, contributing 0.39 percentage point to headline inflation. Diesel surged 17 percent and gasoline rose 8 percent, marking the strongest energy-driven inflation since the early phase of the Ukraine war.
Given lag effects, the pass-through from higher fuel costs is expected to intensify in the coming months.
Import price pressure has been further exacerbated by the weakening currency. The Korean won, which averaged 1,451.6 per dollar in February, depreciated 2.6 percent to an average of 1,493.83 in March. Since early April, it has spiked above 1,500-per-dollar — a threshold not seen since the global financial crisis.
At the same time, higher input costs and prolonged weakness in domestic demand are expected to drag growth below the government’s 2 percent target this year, potentially keeping the economy in the 1 percent range for a second consecutive year.
Despite the slowdown, the central bank has little room to adjust policy in either direction due to financial stability concerns. Household debt remains elevated at over 1,900 trillion won ($1.30 trillion), constraining the scope for rate cuts while also limiting the tolerance for further tightening.
Market participants largely expect the central bank to remain on hold for the time being, as uncertainty persists over the outlook in the Gulf, including the timeline for a full reopening and normalization of trade through the Strait of Hormuz.
Governor Rhee Chang-yong is set to explain the decision later in the day, marking his final policy meetings before his term ends on April 20 and hands over the helm to nominee Shin Hyun-song.
On Friday, the won opened at 1,475.1 per dollar in the Seoul foreign exchange market. Korea's capital markets have improved this week after a truce was announced. The three-year government bond yield closed Thursday at 3.338 percent and the 10-year at 3.660 percent, sharply retreating from the level close to 4 percent last month.
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