The Bank of Korea (BOK) said on Wednesday that inflation is expected to remain above its medium-term target through next year, as upward price pressures persist despite signs that talks between the United States and Iran could ease the regional conflict.
In its semi-annual report on inflation-targeting policy, the central bank cautioned that inflation will stay elevated for a prolonged period. While it noted that oil prices should gradually decline if the war situation eases, the BOK warned that cost-side inflationary pressure from elevated oil prices and exchange rates is likely to transmit to other goods and services.
The bank projected consumer inflation to hover around 3% in the second half of the year and to continue exceeding its 2% medium-term target into next year. The report highlighted growing demand-side pressure from wage increases, including large bonus payments at some technology companies, as a factor supporting inflation above target.
Those projections reinforce arguments for monetary tightening as soon as next month, the central bank said, following a May rise in consumer inflation to 3.1% - a more than two-year high - which was propelled in part by higher oil prices linked to the Middle East conflict.
Separately, details emerged on Tuesday regarding an interim agreement between the United States and Iran to halt the war in the Middle East. U.S. President Donald Trump said the pact will rule out a nuclear weapon for Tehran, and a U.S. official indicated that Iran would be allowed to sell oil once it signs the agreement. The BOK commented that such developments could lead to a gradual decline in oil prices, but maintained that existing cost and exchange-rate pressures would continue to feed through to domestic prices.
The global policy backdrop has also seen other central banks responding to war-driven energy shocks. On Tuesday, the Bank of Japan raised interest rates to a 31-year high in a move it had signalled, saying it stood prepared to tighten further to confront inflationary pressure from the energy shock.
Minutes from last month’s BOK board meeting, released on Tuesday, showed that a majority of board members believed policymakers should prepare to tighten policy soon. The minutes cited escalating inflationary pressures from high global oil prices and robust export growth as reasons to be ready to act.
The BOK’s assessment underlines the tension between an improving geopolitical picture and persistent domestic inflation drivers - a mix the central bank says will keep inflation above its target horizon and increase the likelihood of nearer-term rate increases.