The Bank of Korea held rates steady but raised its inflation outlook; two policymakers voted for a rate hike.

The Bank of Korea kept its seven-day repo rate unchanged at 2.50%, maintaining its policy pause since last July—its eighth consecutive hold as of May 28. Yet this meeting was far from quiet. The decision was not unanimous: two of the seven monetary policy board members voted in favor of a rate hike—a rare internal split that immediately ignited market expectations of a policy pivot. Simultaneously, the central bank significantly revised upward its economic forecasts: its 2026 inflation projection was raised from 2.2% to 2.7%, and its growth forecast lifted from 2.0% to 2.6%. The Bank stated it would "implement policies to stabilize inflation at the target level" and emphasized the need to "monitor sharp exchange-rate fluctuations." Why the sudden hawkish shift? Stronger-than-expected inflation and export growth. The core driver behind this shift is the simultaneous upside surprise in both inflation and growth. On inflation: Korea’s April consumer price index rose to 2.6%, the highest in 21 months—up from 2.2% in March. The closure of the Strait of Hormuz due to the Iran war pushed up energy costs, serving as the primary catalyst for this acceleration. On growth: exports surged robustly—April exports jumped 48% year-on-year, while the revised March figure stood at 50%. Semiconductor shipments soared, buoyed by surging global demand from tech firms building AI infrastructure. With both inflation and growth accelerating, the Bank’s prior rationale—using accommodative policy to support growth—has become untenable. Cho Yong-gu, Fixed Income Strategist at Shinhan Investment & Securities, commented: "Inflation appears to have further upside potential, making a Bank of Korea move in July quite likely."

Amid the shadow of the Iran war, South Korea’s March exports surged 48% year-on-year, with semiconductors serving as the core engine.

Semiconductors were undoubtedly the core engine behind South Korea’s explosive March export growth. Data shows semiconductor exports surged 151.4% year-on-year to USD 32.83 billion—accounting for nearly one-quarter of Korea’s total exports and marking the first time ever exceeding USD 30 billion. Jeeho Yoon, Economist at BNP Paribas, noted: "Although spot prices for memory chips have recently eased, they remain above year-ago levels—supporting continued strong export growth. Closely monitoring whether price momentum faces a sharp reversal, and whether volume growth can be sustained, will be critical." Geopolitical conflict disrupts energy supply chains—petrochemical exports under pressure Despite the stellar overall export figures, negative spillovers from the Iran war on Korea’s economy have begun to emerge. As a major energy importer heavily reliant on Middle Eastern oil and gas, Korea now faces rising import costs and heightened inflation risks amid soaring crude prices. Driven by global oil price increases triggered by the Middle East conflict, Korea’s petroleum product exports in March surged 54.9% year-on-year to USD 5.1 billion. However, to address domestic supply shortages, the Korean government imposed export restrictions on gasoline and diesel on March 13—leading to respective year-on-year declines of 5% and 11% in their export volumes. More seriously, naphtha—the key feedstock for the petrochemical industry—saw its March export volume plummet 22%. Korea has already imposed temporary export restrictions on naphtha, citing supply tightness caused by disrupted shipping through the Strait of Hormuz since late February. Jeeho Yoon warned: "Government export restrictions on naphtha—and potential future curbs on other petrochemical products—could weigh on exports. There are concerns these effects may partially show up in April’s export data, though we believe overall export growth will remain resilient, driven by semiconductors." Strong U.S. demand, collapsing exports to the Middle East By destination, Korea’s exports to the world’s two largest economies both posted robust gains. In March, Korea’s exports to the United States surged 47.1% year-on-year to USD 16.34 billion, primarily driven by strong demand for chips and computers.

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