The central bank said Wednesday that inflation would remain elevated for a "considerable period," with price pressure gradually shifting from oil and currency shocks to wages and domestic demand. It projected consumer inflation to hover around 3 percent through much of the second half of the year.
The message amounted to a textbook case for policy tightening, delivered with unusual weight as Bank of Korea Governor Shin Hyun-song personally led the regular inflation briefing instead of leaving it to director-general level officials.
He was joined by Deputy Governor Lee Ji-ho, the head of the central bank's research department and officials overseeing inflation and employment analysis.
"It would take some time before the energy supply chain returns to pre-war levels and international oil prices stabilize," Shin said.
In its report, the BOK projected consumer inflation to remain around 3 percent in the second half of this year. Core inflation, which excludes food and energy prices, is expected to stay in the mid-to-high 2 percent range.
The outlook marks a clear shift from December, when the BOK expected inflation to remain close to its 2 percent target on weaker global oil prices and stable core inflation.
Kim Young-joo, director-general of the BOK's Inflation and Employment Department, said inflationary pressure was changing its source rather than disappearing.
"Oil-related upward pressure will ease next year, but demand-side pressure will gradually grow, keeping both headline and core inflation above the target," Kim said.
The first phase of the inflation shock came from oil prices, a weak won and higher transport costs. The second phase could come from rising wages, income gains and stronger domestic demand.
Consumer prices rose 2.4 percent from a year earlier in the first five months of this year, up from 2.2 percent in the second half of 2025.
Inflation had hovered around the BOK's 2 percent target before the Gulf crisis but accelerated to 3.1 percent in May, the first reading above 3 percent since March 2024.
Living-cost inflation rose to 3.3 percent in May, while core inflation climbed to 2.5 percent.
The weak won has added to the burden. The dollar averaged 1,467.35 won in December and 1,491.39 won in May, before rising further to an average of 1,526.58 won in June through June 16.
Oil prices have retreated from wartime highs, with WTI and Brent crude falling below $80 a barrel on Tuesday after renewed U.S.-Iran talks raised hopes that shipping through the Strait of Hormuz could normalize.
Shin, however, cautioned against being swayed by short-term market moves.
"Over the past day or two, oil prices have fallen and other asset prices such as stocks and bonds appear to have shifted into a risk-on mode," he said. "But rather than reacting to daily market fluctuations, we should make judgments based on long-term economic fundamentals."
He added that oil prices, much like financial assets, can swing sharply with changes in investor sentiment, making it too early to conclude that the recent decline would be sustained.
"The impact of high oil prices can spread beyond energy to other sectors of the economy. The medium- to long-term second-round effects are what matter," Shin said.
The BOK said any decline in oil prices could be gradual because of infrastructure repairs and restocking demand, while earlier oil-price gains could continue feeding into domestic prices with a lag.
"Cost-side pressure from high oil prices and a weak won will gradually spread beyond petroleum products," Kim said.
He added that the delayed effects of higher oil prices could also increase pressure for public utility fee hikes in the second half.
The BOK pointed to the Russia-Ukraine war as a precedent, saying crude-price shocks tend to spread from petroleum products to non-energy items with a lag of about six months, including processed food, dining-out services and manufactured goods.
The report also flagged wages as a possible second-round inflation channel. Special bonus payments in the IT sector jumped 60.6 percent in the first quarter, though the central bank said the inflationary impact would depend on whether those gains remain concentrated in a few companies or spill over into other industries.
Shin tied those risks directly to the bank's policy stance.
"We take seriously the fact that higher inflation could add to the economic burden on the public," Shin said. "We will closely monitor inflation trends and respond actively until we are confident that inflation will stabilize at the target level."
Since taking office in April, Shin has been unequivocal about the policy shift.
At his first rate-setting meeting in May, he indicated that rates would likely move higher before eventually coming down, while keeping the benchmark interest rate unchanged at 2.5 percent for a full year.
He further signaled urgency during the central bank's 76th anniversary event last week, saying the BOK would not be late in raising interest rates if inflation risks intensified.
The central bank's latest dot plot also pointed to two to three rate hikes ahead.
The BOK's next policy meetings are scheduled for July 16 and Aug. 27.
Shin, however, brushed aside the possibility of a single 50-basis-point move, saying conditions were not severe enough to warrant the kind of emergency hike seen in previous crises.
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