Inflation concerns rise as won weakens to 1,500 to the dollar

The won weakened as the exchange rate with the dollar climbed past the 1,500s level and yields on 10-year Treasury bonds rose above 4 percent as the prolonged Iran war renewed concerns over persistent inflation.

With a set of triple ordeals looming over the Korean economy — rising prices, a weakening won and higher bond yields — analysts increasingly wager on the Bank of Korea (BOK) shifting back toward a hawkish monetary policy stance.

The yield on 10-year Treasurys closed at 4.239 percent on Monday, up 0.022 percentage points from the previous session, according to data from the Korea Financial Investment Association's bond information center.

The benchmark yield had already surpassed 4 percent on May 12 for the first time in two years and six months, and has continued to rise since then. The three-year treasury bond yield also rose to 3.757 percent, the highest level since November 2023.

Bond markets are already pricing in the possibility of renewed monetary tightening. Long-term global bond yields also climbed.

The 30-year U.S. Treasury bond yield climbed above 5 percent, its highest level since 2007. Japan's 10-year government bond yield rose above 2.7 percent, also its highest level in 26 years.

"Prolonged military conflict between the United States and Iran has heightened the risk of supply-driven inflation, while concerns over fiscal credibility in Britain and Japan could spread instability in global bond markets across broader financial markets," said Yoon Yeo-sam, an analyst at Meritz Securities.

Inflationary pressure also remains strong.

Consumer prices rose 2.6 percent in April from a year earlier, the highest since July 2024. Service-sector prices — including dining-out costs, insurance and housing expenses — have been slow to ease. Even if energy and food prices stabilize, service prices tend to stay high once they rise, reflecting additional factors such as wages and rent.

Core inflation, which excludes volatile food and energy prices, has also remained stuck at around 2.2 percent, reinforcing concerns over a so-called sticky inflation, or inflation that remains persistently high because prices for goods and services don't fall easily even after broader economic pressures ease.

Some analysts say consumer prices may rise more than 3 percent in May if higher global oil prices and the weakening won are fully reflected in prices.

The one-year inflation rate projection has also been readjusted to 2.9 percent, up from an earlier outlook of 2.7 percent. The Korea Development Institute raised its inflation outlook for this year to 2.7 percent from 2.1 percent, signaling that policymakers should remain cautious about shifting toward monetary easing.

Korea's gross domestic product grew 1.7 percent in the first quarter from the previous quarter, marking the fastest growth in five and a half years. With the semiconductor sector recovering and exports remaining strong, market analysts say inflation concerns are outweighing worries about an economic slowdown.

Pressure from the weakening won is also growing.

The dollar-won exchange rate remained above the 1,500 level during Monday's trading session and closed at 1,500.3 won. A weaker won raises import prices and can further fuel domestic inflation. Analysts also warn that persistently high oil prices and a weak local currency could stimulate further inflation expectations.

At the same time, a weakening won could accelerate foreign capital outflows and increase financial market instability, and add even more pressure on the BOK to keep tightening rather than shift toward easing.

Sentiment within the central bank also appears to be changing.

Yoo Sang-dai, senior deputy governor at the central bank, recently said that “it may be time to consider stopping rate cuts and discussing rate hikes."

Kim Jin-il, a newly appointed member of the Monetary Policy Board, also said that "it may be better to raise interest rates slightly and gradually accept sacrifices elsewhere to prevent major financial instability." Even Shin Sung-hwan, a former Monetary Policy Board member previously considered dovish, said that "cutting interest rates under current conditions would be quite difficult."

Global central banks are also leaning toward tightening. Australia and Norway recently raised interest rates, while the European Central Bank and the Bank of Japan are considered possible candidates for further tightening.

Even so, markets are placing greater weight on the possibility that the BOK will keep rates unchanged while adopting a more hawkish tone at the upcoming Monetary Policy Board meeting on May 28.

"There is a high possibility that the benchmark interest rate will remain unchanged at this meeting," said Park Hyung-joong, an economist at Woori Bank. "But the Monetary Policy Board members' perceptions of inflation and interest rates have likely changed compared to what they thought in February."

Yang Jun-seok, a professor at the Catholic University of Korea, also said more people are acknowledging that raising the interest rate is necessary.

"There are now more reasons to raise interest rates than to lower them," said Yang. "There is a strong possibility of at least one rate hike in the third quarter."

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.

BY KIM WON [[email protected]]