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BOK maintains base rate as it adopts 'cautious' stance, wary of inflation due to Middle East conflict

Published: 12 Mar. 2026, 17:51 Updated: 12 Mar. 2026, 18:01

Park Jong-woo, left, deputy governor of the Bank of Korea, speaks at a press briefing on the Monetary Policy Report at the central bank in Jung District, central Seoul, on March 12. [BANK OF KOREA]

The Bank of Korea (BOK) signaled that it will maintain a “cautious neutral stance” in monetary policy for the time being, tightening its guard further against inflation. The central bank appears to believe price risks surrounding the global economy remain substantial.

“Rather than shaping expectations toward any specific policy direction, monetary policy needs to maintain a cautious neutral stance while watching changes in domestic and external conditions and the flow of economic indicators,” the BOK wrote in its monetary policy report released Thursday.

The report reviews monetary policy management since August 2025 and recent changes in the policy environment.

The BOK assessed the domestic economy as showing relatively stable trends in both prices and growth. Consumer inflation has remained near the target of 2 percent, and growth has improved more than expected thanks to recovering consumption and strong exports led by semiconductors.

For that reason, the BOK has kept the base rate unchanged at 2.50 percent for six consecutive meetings, since May of last year.

Still, the report repeatedly flagged concerns over global inflation risks, warning that if growth in major economies proves stronger than expected and expansionary fiscal policy continues, inflationary pressure could build again from the demand side. The BOK estimates that a 1 percentage point rise in global inflation will raise domestic inflation by about 0.2 percentage points.

It also cited rising demand for semiconductors, energy and metals from expanded investment in AI data centers, along with higher global oil prices caused by tensions in the Middle East, as upward risks to inflation.

The Bank of Korea's main building in Jung District, central Seoul, as seen on Aug. 12, 2025 [YONHAP]

“Since March, volatility in financial and foreign exchange markets has expanded sharply because of geopolitical risks, including the conflict in the Middle East,” said Hwang Kun-il, a member of the Monetary Policy Board who oversaw the report. “Given that interest rates and exchange rates could show elevated volatility detached from economic fundamentals because of Middle East risks, authorities need to respond through market stabilization measures if necessary.”

The exchange rate also emerged as a key variable. The BOK projected that pressure weakening the won would gradually ease as dollar supply and demand conditions improve, but noted that the won's volatility could still increase depending on regional currencies such as the Japanese yen.

In the second half of last year, the correlation coefficient measuring how closely the won moved with the yen rose to 0.53 from 0.35 in the first half.

Markets interpreted the report as a signal that the BOK is unlikely to cut rates anytime soon. Some are also raising the possibility that the central bank may tighten its belt again if inflation pressure intensifies due to rising oil prices as the conflict in the Middle East drags on.

3-D-printed oil pump jacks, the Iranian flag and a rising stock graph appear in this illustration from March 2. [REUTERS/YONHAP]

“At present, Middle East risks are creating cost-side inflationary factors such as higher oil prices,” said Park Jong-woo, deputy governor of the BOK. “If those factors persist for a prolonged period, they could affect inflation expectations and accelerate inflation through second-round effects.”

“In the end, what matters is not the size of the shock but how long it lasts,” he added.

Park added that the BOK would decide its monetary policy after reviewing the effects on growth, prices and other factors at next month’s Monetary Policy Board meeting.

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]]