(3rd LD) BOK again holds key rate steady as Middle East war fuels inflation, growth risks

(ATTN: ADDS BOK chief's remarks in paras 7, 15, 19-25; TRIMS)By Oh Seok-min

SEOUL, April 10 (Yonhap) -- South Korea's central bank kept its benchmark rate unchanged Friday, as uncertainty in the Middle East prompted a cautious stance amid risks of inflation, currency weakness and slower growth.

In a widely anticipated decision, the Monetary Policy Board of the Bank of Korea (BOK) held the key rate steady at 2.5 percent in its latest rate-setting meeting in Seoul.

It marked the seventh consecutive on-hold decision, even as the central bank remains in an easing cycle.

The BOK began monetary easing in October 2024 and has cut the benchmark interest rate by a cumulative 100 basis points from 3.5 percent to support economic growth, but it has kept it unchanged since July 2025.

"There is a high degree of uncertainty surrounding the future course of developments in the Middle East, amid rising upside pressures on inflation, increasing downside risks to growth and heightened volatility in financial and foreign exchange markets stemming from the Middle East war," the BOK said in a released statement.

The rate freeze decision was unanimous, the BOK noted.

"Today's decision was not simply a postponement of judgment, but reflects the need to take a closer look at the development of the Middle East conflict and its spillover effects before setting policy. If the supply shock is temporary, we do not respond with interest rate adjustments," BOK Gov. Rhee Chang-yong told a press briefing.

Experts said the BOK faces a difficult policy trade-off as the Middle East conflict that began late February following U.S.-Israeli strikes on Iran has escalated into a broader regional crisis, intensifying inflationary pressures and foreign exchange volatility.

Consumer prices rose 2.2 percent in March from a year earlier, up from 2 percent in February, due mainly to a surge in global oil prices amid supply disruptions.

While inflation remains close to the 2 percent target, the modest increase in March was largely afforded by the government's fuel price cap and lower volatility in fresh food prices, and the BOK has warned that upward pressure could build further as the impact of the Middle East conflict spreads.

"Consumer price inflation for the year is expected to exceed considerably the February forecast of 2.2 percent," the BOK said.

The Korean won has weakened markedly in recent sessions, hovering around the psychologically significant 1,500 level, its weakest since 2009, when the country grappled with the global financial crisis.

Concerns over inflation and further currency weakness persist as a seemingly fragile two-week ceasefire between the U.S. and Iran keeps uncertainty high, while global oil prices are unlikely to return to pre-conflict levels, according to analysts. The local currency is also being weighed down by sustained net selling of local stocks by foreign investors.

A rate cut could trigger capital outflows, potentially adding further pressure on the currency, according to experts.

"It is difficult to comment on the level of the exchange rate, but the current account surplus is large and foreign currency liquidity remains ample," Rhee said. "Given the overall supply-demand dynamics, I believe the exchange rate could fall back quite quickly to levels seen before the conflict if the situation in Iran stabilizes."

Despite the need to ensure financial stability, raising interest rates risks dampening growth.

Last month, the Organization for Economic Cooperation and Development (OECD) cut its 2026 growth forecast for South Korea to 1.7 percent from 2.1 percent, citing the impact of the Middle East crisis.

The government is pushing for a 26.2 trillion-won (US$17.71 billion) supplementary budget to cushion the impact of the conflict, and tighter monetary policy could blunt the effect of fiscal support, analysts said.

The BOK said the growth rate for this year "is expected to be below the February forecast of 2 percent," despite strong semiconductor exports and a supplementary budget, due to higher energy prices and supply constraints.

While the February outlook was based on the assumption that Brent crude would average $64 per barrel, Brent prices surged more than 60 percent in March to well above $100 per barrel, as the Strait of Hormuz, a strategic waterway, has been effectively shut since the start of the conflict.

"The possibility of stagflation, as of now, is seen as low. The situation two weeks ahead is unpredictable, making it difficult to make firm projections. If things were to escalate to the worst-case scenario, it would be hard to rule out stagflation," Rhee said.

Another focus was housing prices and household debt.

While the government has tightened regulations in the property market, including lending restrictions on owners of multiple homes, housing prices in Seoul and parts of the surrounding Gyeonggi Province have yet to show signs of easing.

"Rising housing prices that consistently outperform returns on all other assets are a negative development for the efficient allocation of capital. To stabilize property prices, concentration in the capital region must be addressed," Rhee said.

Friday's rate-setting meeting was the last under Rhee's term, which ends on April 20. Shin Hyun-song, an Oxford-educated economist and former senior official at the Bank for International Settlements (BIS), has been tapped to replace the outgoing BOK chief.

graceoh@yna.co.kr(END)