The Governor of the Bank of Korea warned that the conflict in the Middle East will worsen inflation.

Bank of Korea Governor Lee Chang-ryong said on Friday that the escalating conflict in the Middle East is increasing inflationary pressures and bringing downside risks to South Korea's trade-dependent economic growth. Following the unanimous decision of the Bank of Korea's policy committee to keep interest rates unchanged for the seventh consecutive meeting, Lee Chang-ryong announced in a television press conference that he expects the economic growth of Asia's fourth largest economy to fall below the forecasted 2.0% in February this year. He stated that the central bank currently predicts that the country's inflation rate in 2026 will significantly exceed the forecasted 2.2% in February. "The current economy is facing supply shocks stemming from the Middle East conflict," said the outgoing Bank of Korea Governor, whose four-year term will end on April 20. Lee Chang-ryong acknowledged the uncertainty brought by geopolitical risks to the central bank, with these risks heavily impacting South Korea as a major importer of Middle Eastern oil, natural gas, and other industrial raw materials. He added that the central bank is not in a rush to take action at this stage. "If the shocks are temporary, considering policy lags, it may not be appropriate to respond by adjusting interest rates," he said. "But if the shocks prove to be persistent, leading to broader inflationary pressures and anchored inflation expectations, then policy responses will be necessary." Addressing concerns about stagflation in South Korea, he stated that the risks will depend on how the situation in the Middle East evolves. "At this stage, the risk of stagflation seems limited," he said. "But in the worst-case scenario, this risk cannot be ruled out." He believed that fiscal stimulus measures by the government are positive amidst the escalating downside risks to growth. The Bank of Korea is scheduled to hold a policy meeting in May, where the new governor will adjust the country's growth and inflation outlook.