South Korea markets: Oil price decline not changing rate hike prospects
Rate hike in July.
Group Research - Econs, Ma Tieying18 Jun 2026
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The Bank of Korea has signalled that it remains prepared to raise interest rates despite the recent decline in oil prices following the easing of Middle East tensions. In its semiannual report released on June 17, the BOK said inflation is expected to remain elevated for an extended period, staying around 3% in the second half of 2026 and above 2% in 2027. Governor Shin also said at the press conference that the BOK will actively respond to rising inflation until it is confident that inflation is firmly stabilizing toward the 2% target.

The BOK remains concerned about the lingering inflationary impact of the Iran war. Drawing on the experience of the Russia-Ukraine war, the central bank noted that energy shocks typically transmit to industrial goods, non-energy products, and services with a lag of around six months. These second-round effects can continue to put upward pressure on inflation even after oil prices have started to retreat.

The BOK is also monitoring rising demand-side price pressures from wage growth. Large bonus payments at some South Korean semiconductor firms amid the AI boom could fuel broader wage demand across industries, potentially supporting household income and consumer spending.

We share the BOK’s assessment that CPI inflation will remain above 3% in the second half of the year, with the peak likely to occur around August. Despite the decline in oil prices, accumulated upstream cost pressures remain elevated, with PPI inflation running at around 7%. These cost pressures are likely to be partially passed through to downstream producers and retailers over the coming months.  On the demand side, broad-based wage acceleration has yet to materialize, with regular wage growth remaining around 2%. However, consumer demand is showing signs of recovery, supported by the equity market rally and a rebound in property prices. We maintain our forecast for a 25bps rate hike to 2.75% in 3Q (July) and add another 25bps hike to our forecast, expecting the policy rate to rise further to 3.00% in 4Q.

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]



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