[Monetary Policy Poll]②Iran War Hits Inflation First... All Experts "Raise Forecasts"

Asia Business Daily Survey of 13 Domestic and International Economic Experts
Impact of the War: Inflation Forecasts Raised, Growth Projections Lowered
Most Experts Predict 2.4% Inflation Rate for South Korea This Year
Fewer Expect Growth Ab

With the Bank of Korea’s base rate decision scheduled for April 10, the majority of domestic experts expect that the nation’s consumer price inflation rate will exceed 2.4% this year. This upward revision in inflation outlooks is a result of all surveyed experts raising their projections following the start of the Middle East war at the end of February. The experts believe that the sharp rise in international oil prices could impact not only energy prices but also transportation costs, raw material prices, and the broader Korean economy. Many have also revised their growth forecasts downward, reducing optimism that the growth rate will surpass 2%. Most respondents pointed to high oil prices as the key variable influencing the Bank of Korea’s monetary policy, predicting that for the time being, rate decisions will be driven primarily by inflation trends.

This Year’s Inflation Rate: All Forecasts Raised... Some Predict 2.6%

According to a survey conducted by The Asia Business Daily between March 31 and April 3 of this year with 13 economic experts from domestic and foreign research institutes, securities firms, and banks, 82% of respondents (9 experts; 2 did not respond) forecast that Korea’s consumer price inflation rate would exceed 2.4% this year. Specifically, four experts projected 2.4%, three projected 2.6%, and two projected 2.5%. Only one expert predicted 2.2%, the same as the Bank of Korea’s February forecast. All respondents raised their inflation outlooks by approximately 0.2 to 0.4 percentage points.

Experts believe that the increase in international oil prices and the KRW-USD exchange rate, triggered by the Middle East war, will have a direct impact on domestic inflation. Minju Kang, Chief Economist at ING Bank, raised her projection from 2.2% to 2.4%, stating, “While the March inflation rate was not as high as expected, the impact will become visible starting in April.” Kim Seongsoo, a researcher at Hanwha Investment & Securities, also raised his projection from 2.1% to 2.4%, explaining, “Even if the war ends, it may take additional time for supply chains and infrastructure to return to normal operations.”

They expect that rising international oil prices will push up not only energy prices such as gasoline but overall prices across the domestic economy. Yunmin Baek, a researcher at Kyobo Securities who revised his forecast to 2.5%, pointed out, “In Korea’s case, about 70% of crude oil is imported from the Middle East, and the proportion of imported raw materials and intermediate goods—including crude oil, natural gas, plastics, and construction materials—is high. While the impact on growth could be limited, inflationary pressure is unavoidable.” Yonggu Cho, a researcher at Shin Young Securities, who raised his projection from 2.4% to 2.6%, said, “With the war continuing through the end of March, we are entering the initial stage of a pessimistic scenario. This forecast also assumes that oil prices and the exchange rate will stabilize moderately after April, leaving room for further upward revision.”

The main factor limiting the extent of price increases is the effect of government policies. Experts believe that policy measures such as the implementation of a petroleum price ceiling will partially offset the impact by preventing the full extent of international oil price increases from being reflected in domestic inflation. Junhee Han, Senior Research Fellow at NH Financial Research Institute, stated, “The government’s price stabilization policies and weaker demand are likely to act as mitigating factors, making a sharp inflation spike less likely and instead leading to a more gradual upward path.”

Reduced Expectations for 'Above 2%' Growth Rate... 45% Lower Their Forecasts

As for the nation’s economic growth rate this year, among respondents (with 2 non-responses), 6 experts forecasted 2.0%, making it the most common projection. Two predicted 2.1% and another two projected 1.8%, while one expert expected 1.9%. With 45% of experts (5 individuals) lowering their growth forecasts, the number of respondents expecting growth above 2% fell from nine to eight. The upper bound for growth forecasts also dropped, from 2.2% to 2.1%.

The main reason for this downward revision in growth forecasts was, again, the Middle East war. Junhee Han, Senior Research Fellow, lowered his growth projection from 2.0% to 1.8%, stating, “The oil price shock from the Middle East is not just about higher prices; it also raises the possibility of supply disruptions and increased logistics costs, which are putting pressure on domestic demand. If this shock lasts for at least three to six months, the resulting increase in energy costs will inevitably lead to weaker consumption.”

However, experts also believe that some factors could offset the decline in growth, such as the solid performance of the semiconductor industry, robust export results driven by the strong KRW-USD exchange rate, and the government’s supplementary budget. Yeosam Yoon, a researcher at Meritz Securities, lowered his growth forecast from 2.1% to 1.9%, but pointed out, “With a solid export base, the degree of decline may be less severe than feared.” Jaegyun Ahn, a researcher at Korea Investment & Securities, added, “An expanded supplementary budget could provide a boost to growth and partially limit the economic downturn.”

In fact, some experts have even raised their growth forecasts. Moonjong Hur, Head of the Woori Financial Management Research Institute, increased his projection from 1.8% to 2.0%, explaining, “Despite external uncertainties from the Middle East and sluggish construction investment, favorable export conditions led by semiconductors and a recovery in private consumption due to income improvement could lift the growth rate further.”

Key Rate Decision Variables: High Exchange Rate and Inflation... “The Direction of Expected Inflation Is Crucial”

With the Monetary Policy Board of the Bank of Korea expected to keep the base rate unchanged this month, experts believe that inflationary pressures from high oil prices and a strong KRW-USD exchange rate will be the most significant variables influencing the rate decision. Of the 13 respondents, 7 selected high oil prices as the top variable, followed by 6 who cited “concerns about rising prices.”

They expect that, at least for now, the top priority of monetary policy will be price stability. Researcher Baek Yunmin explained, “While concerns over financial stability risks have limited expectations for monetary easing, inflation risks are variables that can actually shift the direction of monetary policy. If inflation risks are significantly heightened, the Bank of Korea’s monetary policy response may become focused on price stability.” Chief Economist Minju Kang similarly predicted, “For now, price stability will be the most important policy objective.”

However, experts also noted that inflation driven by high oil prices and a strong exchange rate could lead to weaker domestic demand, creating downward pressure on interest rates over the medium to long term. Researcher Yeosam Yoon pointed out, “If the domestic economy, weakened by a medium- to long-term growth shock, sees inflationary pressure subside, this could in fact increase the likelihood of a rate cut.” Sanghyeon Park, a researcher at iM Securities, also noted, “With the potential for a prolonged Iran-related crisis, both inflationary pressure and economic slowdown pressure are arising simultaneously.”

Regarding the possibility of a rate hike, experts emphasized that it depends on whether inflation persists and how consumer expectations about inflation change. Seungwon Kang, a researcher at NH Investment & Securities, said, “The central bank only responds when supply shocks affect expected inflation. The direction of expected inflation could be the most important variable for monetary policy.” Researcher Yeosam Yoon also noted, “If the burden of higher oil prices is transmitted to expected inflation, there could be as many as two rate hikes within the year.” Yeha Ahn, a researcher at Kiwoom Securities, added, “Whether inflationary pressure is seen as temporary will be an important variable in policy decisions.”

Experts Who Participated in the Survey (in Korean alphabetical order)

Minju Kang, Chief Economist at ING Bank; Seungwon Kang, Researcher at NH Investment & Securities; Gongdongrak, Researcher at Daishin Securities; Seongsoo Kim, Researcher at Hanwha Investment & Securities; Hongcheol Moon, Researcher at DB Securities; Sanghyeon Park, Researcher at iM Securities; Yunmin Baek, Researcher at Kyobo Securities; Yeha Ahn, Researcher at Kiwoom Securities; Jaegyun Ahn, Researcher at Korea Investment & Securities; Yeosam Yoon, Researcher at Meritz Securities; Yonggu Cho, Researcher at Shin Young Securities; Junhee Han, Senior Research Fellow at NH Financial Research Institute; Moonjong Hur, Head of Woori Financial Management Research Institute

This content was produced with the assistance of AI translation services.