Home > Business > Finance

BOK flags stagflation risk in worst-case Iran war scenario

Published: 10 Apr. 2026, 16:37 Updated: 10 Apr. 2026, 17:35

JIN MIN-JI
[email protected]

Bank of Korea Gov. Rhee Chang-yong speaks to reporters during a press conference following the Monetary Policy Board meeting to keep the rate unchanged at 2.5 percent at the bank in central Seoul on April 10. It was a unanimous decision as geopolitical uncertainty in the Middle East remains high. [BOK]

The Bank of Korea (BOK) said that a worst-case escalation of tensions in the Middle East could tip the economy into stagflation, as it held the benchmark interest rate steady for a seventh straight meeting on Friday. The decision comes as the economy faces pressure from rising inflation and weakening growth amid uncertainty over the conflict.

The BOK kept the rate unchanged at 2.5 percent in a widely expected decision, with the board voting unanimously as policymakers opted to monitor the ripple effects of heightened uncertainty stemming from the Iran war.

“The Korean economy is facing a supply shock stemming from the war in the Middle East,” said BOK Gov. Rhee Chang-yong in a press conference following the board’s meeting — his final monetary policy meeting — at the bank in central Seoul.

“If the supply shock turns out to be temporary, it would be desirable not to respond with interest rate adjustments. However, if the shock persists, leading to broader inflationary pressures and destabilizing inflation expectations, a policy response would become necessary. At this point, it remains difficult to determine how the situation in the Middle East will unfold,” Rhee added.

The United States and Iran are scheduled to hold the first round of talks on Saturday.

Rhee said Korea’s heavy reliance on energy imports from the Middle East, combined with the country’s improving yet uneven economic growth, has culminated in concerns over both inflation and growth. This contrasts with the 2022 Russia-Ukraine war period, when the economy was in a rapid recovery phase as demand suppressed during the pandemic rebounded.

According to Rhee, if the conflict in the Middle East resolves soon, then the likelihood of stagflation is low. While inflation stood at 2.2 percent in March and its growth is showing some signs of weakening, he said the situation remains manageable to a certain extent. However, he warned that in a worst-case scenario involving mutual retaliation and the destruction of energy infrastructure, which could have lasting effects even after the crisis ends, “it would be difficult to deny the possibility of stagflation.”

The governor also said the won could rapidly strengthen once tensions stabilize, citing Korea’s inclusion in the FTSE World Government Bond Index, the gradual decline of retail investors’ overseas investment and discussions over the National Pension Service’s reduction in overseas investments this year.

The won significantly weakened following U.S.-Israeli strikes on Iran in late February, repeatedly breaking the psychological threshold of 1,500 won per dollar. As tension recently showed signs of easing, the won has stabilized, trading at 1,482.5 as of Friday, with the dollar index falling below 99. But the won remains weaker than the 1,460 level seen early last year, making it one of the key issues for incoming BOK governor nominee Shin Hyun-song, as a weaker currency could fuel inflation by raising import costs.

Shin is expected to take office in late April following a confirmation hearing.

An electronic display board shows Korea's financial markets in Hana Bank's trading room in central Seoul on April 10. [YONHAP]

Rhee noted that “from a financial stability perspective, attention should be paid to the impact of increased exchange rate volatility.”

“Future policy decisions will be made after closely monitoring changes in domestic and external conditions, including the Middle East conflict, as well as resulting movements in inflation, growth and financial stability,” he added.

Rhee’s four-year term as the BOK governor is set to end on April 20. During his tenure, the benchmark rate was raised from 1.25 percent to 3.5 percent in early 2023 before being cut to 2.5 percent.

BY JIN MIN-JI [[email protected]]