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Korea's central bank stuck between growth and inflation, as other countries face similar challenges

Published: 20 Mar. 2026, 07:00

Rhee Chang-yong, the governor of the Bank of Korea, speaks to reporters during a press conference held at the central bank's headquarters in Jung District, central Seoul, on Feb. 26. [JOINT PRESS CORPS]

The Iran war has driven global oil prices to the $100 level for the first time in four years, making operations for major central banks worldwide much more difficult.

Korea is no exception. With monetary policy choices becoming more unappealing, between rising inflation and slowing growth, the Bank of Korea (BOK) is also facing mounting pressure from a weakened won approaching the 1,500 level against the dollar.

The Federal Reserve on Wednesday held its benchmark interest rate at 3.50 percent to 3.75 percent at the March Federal Open Market Committee meeting, signaling a clear wait-and-see stance rather than an immediate policy shift.

However, market expectations are shifting rapidly. The probability of a rate hike within the next three months stands at 19.2 percent, higher than the probability of a rate cut of 17.3 percent, according to the Atlanta Fed’s market probability tracker. Just a month earlier, expectations for a rate cut had reached 39.7 percent, highlighting how the surge in oil prices has quickly reversed monetary policy expectations.

Policy responses are diverging across countries. The Reserve Bank of Australia raised its benchmark rate by 0.25 percentage points to 4.10 percent on Tuesday, shifting toward a tighter fiscal policy. The Bank of Japan on Wednesday held its short-term policy rate at around 0.75 percent while maintaining its stance of continued rate increases.

The Bank of Canada also kept its benchmark rate unchanged at 2.25 percent but warned of inflationary pressure from rising energy prices and increased volatility in financial markets. The European Central Bank and the Bank of Britain are expected to hold rates steady while closely monitoring the risk of renewed inflation.

An aerial view of the island of Qeshm, separated from the Iranian mainland by the Clarence Strait, is seen in this file photo from Dec. 10, 2023. [REUTERS/YONHAP]

To raise, or not to raise

Major central banks are ultimately facing a dilemma: Raising rates could weigh further on growth, while holding rates steady could fuel inflation.

“The oil price shock could serve as a variable that spreads the tightening trend, previously limited to some countries, to other major economies,” said the Korea Center for International Finance.

Attention is now turning to the BOK ahead of its Monetary Policy Board meeting scheduled for April 10.

The central bank held a task force meeting on Thursday to assess the impact of developments in the Middle East and the Federal Open Market Committee outcome on domestic financial and foreign exchange markets. It identified rising global oil prices, higher U.S. Treasury yields and a stronger dollar as key external risks.

U.S. dollar bills [REUTERS/YONHAP]

Currency, oil and inflation

Domestic conditions are far from easy.

The dollar-won exchange rate has recently risen to around 1,500 won per dollar, while global oil prices have also exceeded $100 per barrel. The simultaneous rise in oil prices and the exchange rate poses a particular burden on Korea’s economy, as it can push up consumer prices through higher import costs while also triggering foreign capital outflows and rising government bond yields.

However, the inflationary environment differs from that during the 2022 Russia-Ukraine war. At the time, recovering consumption and supply shocks drove inflation to the 5 to 6 percent range, while fiscal spending and excess savings supported demand, amplifying inflationary pressure. This led the BOK to aggressively raise its benchmark rate to 3.50 percent.

By contrast, inflation is currently relatively stable in the 2 percent range, and demand-side pressure remains limited amid high interest rates and household debt burdens. Rising oil prices may instead dampen consumption, as increased energy spending tends to reduce other expenditures, according to analysis.

The Bank of Korea main building in Jung District, central Seoul, on Aug. 12 [YONHAP]

Pause for now

Given these conditions, markets expect a “strategic pause” for the time being. “Although higher oil prices could stimulate inflation, the supply-shock nature of the increase suggests the Bank of Korea is likely to hold rates for now and respond cautiously,” Korea Investment & Securities said.

“Should the war continue, the possibility of a rate cut should also remain open to support the economy,” NH Financial Research Institute said.

On the other hand, a prolonged period of high oil prices could revive the case for rate hikes. “If Brent crude prices remain in the $110 to $120 per barrel range, the Bank of Korea may raise rates twice, in July and October,” Citi said.

“The likelihood of a rate cut would effectively disappear if the impact of the Middle East conflict is fully reflected in inflation indicators, forcing some countries to shift toward rate hikes,” said Joo Won, head of research at the Hyundai Research Institute. “The Bank of Korea is also caught in a dilemma over whether and when to raise rates, caught between holding and hiking.”

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]]