BOK Holds Rate at 2.50% Amid Iran War

The Bank of Korea (BOK) held its benchmark interest rate steady at 2.50% on Friday. This marks the seventh consecutive meeting without a change, as policymakers grapple with uncertainty from the protracted US-Iran conflict.

Outgoing Governor Rhee Chang-yong, chairing his final rate-setting meeting, struck a cautiously optimistic tone on the currency market. He suggested the Korean won could stabilize quickly if geopolitical tensions subside.

Policy Pause Continues

The unanimous decision by the monetary policy board reflects a "wait-and-see" stance. The central bank said in its policy statement that maintaining the current rate is appropriate given "heightened uncertainty surrounding the Middle East situation" and simultaneous increases in inflationary and downside growth pressures.

This extends a prolonged period of policy pause. After pivoting toward easing in late 2024 with a series of rate cuts, the BOK has kept rates unchanged since mid-2025. The benchmark rate has now remained at 2.50% for nearly 10 months and is expected to stay there at least until the next meeting in late May.

Analysts said cutting rates under current conditions would risk exacerbating capital outflows and widening the interest rate gap with the US. This could fuel further currency weakness and inflation.

Rhee's Assessment and Warnings

Speaking after the meeting, Rhee acknowledged mounting risks to inflation and growth from the conflict. He said the recent surge in the dollar-won exchange rate has been driven largely by external shocks linked to the Middle East war, adding that a reversal could be equally swift.

"If not for the Middle East war, the exchange rate would already be entering a fairly stable phase," he said. He noted that the pace of the won's appreciation could accelerate if tensions subside.

Rhee highlighted broader structural vulnerabilities facing oil-importing economies like Korea, Japan, and Taiwan. These economies tend to experience sharper currency swings during energy shocks. Policymakers, he said, would need to reassess how best to respond to such asymmetries.

On inflation, Rhee acknowledged that risks have risen amid higher oil prices. He warned that supply-side pressures could intensify given Korea's dependence on energy imports. However, he downplayed the likelihood of stagflation, describing its probability as "low"despite dual pressures of rising consumer prices and slowing growth."There are always conflicting views. Some say we were late to cut, others say we didn't hike enough. But overall, I believe we have managed policy well," he said.

Rhee leaves his nominated successor, Shin Hyun-song, with an economy whose growth remains over-reliant on the chip sector. The source notes the economy is also vulnerable to a renewed pickup in household debt that could threaten financial stability.

Since the conflict's outbreak in late February, Korea's economic outlook has become increasingly fragile. Consumer price inflation has climbed back above the 2% level, driven by rising energy costs. The dollar-won exchange rate, having recently surged past 1,520, remains vulnerable, although the won is clawing back to the high-1,480 range following a temporary US-Iran ceasefire agreement.