Headquarters of Bank of Korea. (Photo courtesy of BOK)
The author is an analyst for NH Investment & Securities. He can be reached at sw.kang@nhsec.com -- Ed.
A prolonged conflict between US and Iran amplifies oil cost burden. However, with strong semiconductor exports limiting downside risks to the Korean economy, the BOK is expected to implement a precautionary rate hike in 3Q26. While the BOK will likely keep the door open to additional tightening, we expect it to pause and assess the effects of the hike through year-end.
Market yields ended flat, as the BOK’s rate hike signals offset expectations for oil price stabilization
Market yields ended flat last week, as the BOK’s rate hike signals for 2H26 offset rising expectations for oil price stabilization through the US-Iran negotiations.
GDP surprise presents monetary policy dilemma
Amid the prolonged US-Iran conflict, the BOK is expected to implement a precautionary rate hike. On May 4, the Senior Deputy Governor Yu Sang-dai specifically mentioned the possibility of a rate hike in 2H26, citing increased inflationary pressure and a semiconductor cycle exceeding market expectation. As the war drags on, global oil prices are likely to remain higher than the central bank’s initial predictions by the end of 2026, even if US-Iran negotiations are completed.
In particular, Korea’s household inflation expectations for April reached 2.9%, the highest level since Aug 2024. It is too early to be certain of the second-round effects, but considering the pronounced lagging nature of Korean household inflation expectations, additional increase looks highly likely.
We predict that following a precautionary rate hike in 3Q26, the central bank will take some time till the end of 2026 to assess the effects. Seasonally, inflation momentum tends to weaken in 4Q, and in end-2026, expectations for a y-y oil price decline for 2027 should strengthen. In addition, inflation is expected to converge back to the target level in 2027. As current market yields have already priced in three rate hikes, the confirmation of the ‘insurance’ rate hike could alleviate extreme market fears.
Seungwon Kang
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