Bank of Korea Keeps Base Rate Unchanged at 2.50%... Caution Prevails Amid War Fallout (Update)

Monetary Policy Meeting Held on April 10

High Oil Prices, Exchange Rate Volatility, and Inflation Concerns After Iran Conflict

Market Expects a Rate Hike Within the Year

The benchmark interest rate was held steady at 2.50% at the last Monetary Policy Committee (MPC) meeting presided over by Lee Chang-yong, Governor of the Bank of Korea, before the end of his term. With this, the rate freeze has been maintained for seven consecutive meetings, following July, August, October, and November of last year, as well as January and February of this year. This decision was influenced by several factors: soaring international oil prices after the war between the United States and Israel and Iran, the won-dollar exchange rate fluctuating above the 1,500-won mark, and concerns about inflation (rising prices).

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary session held at the Bank of Korea headquarters in Jung-gu, Seoul, on the 10th. Photo by Joint Press Corps

On April 10, the Bank of Korea's Monetary Policy Committee decided at a meeting held at its headquarters in Jung-gu, Seoul, to keep the base rate unchanged at 2.50%. This rate freeze was in line with market expectations. In a prior expert survey conducted by The Asia Business Daily, all 13 respondents predicted a rate freeze for this month.

This month's freeze was effectively pre-announced. As oil prices surged due to the Iran war, risk aversion in the market intensified, leading to increased volatility that threatens financial stability. The won-dollar exchange rate, which broke through the 1,500-won threshold, soared to 1,530.1 won as of the weekly closing price on March 31 and has remained at a high level. On April 8, news that the United States and Iran would begin negotiations following a two-week ceasefire caused the rate to plunge by 33.6 won to 1,470.6 won, but it rebounded to 1,482.5 won the very next day, and on this day once again hovered in the mid-1,470 won range, showing high volatility. Analysts note that the market remains unsettled, given expectations that the negotiation process, including the reopening of the Strait of Hormuz, will not proceed smoothly.

Heightened concerns over inflation also supported the decision to keep rates unchanged. While the March consumer price inflation rate (2.2%) did not deviate significantly from expectations, a cautious stance on monetary policy prevailed as the market assessed the severity of the supply shock. Experts predict that the annual inflation rate will exceed the Bank of Korea's earlier forecast of 2.2%, mainly due to high oil prices triggered by the Middle East conflict. Kang Minjoo, Chief Economist at ING Bank, stated, "The impact will become more apparent from April," and raised her inflation outlook from 2.2% to 2.4%. Kim Seongsu, a researcher at Hanwha Investment & Securities, also raised his projection from 2.1% to 2.4%, noting, "Even if the war ends, it will take time for infrastructure such as supply chains to return to normal operations."

The housing market and household debt also remain areas of concern. Although the pace of housing price increases has slowed recently, prices are still on the rise, and the period of moderation has not been long, warranting further monitoring. According to the Korea Real Estate Board's weekly apartment price trends for the first week of April (as of April 6), the average sale price of apartments in Seoul rose by 0.10% compared to the previous week. The pace of increase in Seoul apartment prices had slowed for seven consecutive weeks since the first week of February, dropping to as low as 0.05%, then rebounded to 0.12% over the past two weeks, and has now narrowed again for the first time in three weeks. The Real Estate Board stated, "Transaction activity has slowed in some areas due to a wait-and-see approach, while other regions—such as those with major transport hubs, large complexes, or redevelopment projects—continue to show upward trends, resulting in an overall rise in Seoul."

Expectations that there will be a rate hike within the year have become noticeably more prevalent. This forecast is mainly driven by inflation concerns. Rather than worries about a slowdown in growth, it is the expectation of a more pronounced rise in prices that is seen as likely to have a greater impact on the domestic macroeconomy.

This content was produced with the assistance of AI translation services.