BOK’s Rhee Flags Risk of Market Storm on Israel-Hamas Conflict

Bank of Korea Governor Rhee Chang-yong warned of the risk of market jitters stemming from the Israel-Hamas conflict after the central bank stood pat on interest rates while monitoring developments in inflation, household debt and the Middle East.

(Bloomberg) — Bank of Korea Governor Rhee Chang-yong warned of the risk of market jitters stemming from the Israel-Hamas conflict after the central bank stood pat on interest rates while monitoring developments in inflation, household debt and the Middle East.

“The Israel-Hamas situation is expected to be a factor that could greatly increase market volatility depending on how it unfolds, even though its impact on global financial markets so far remains limited,” Rhee said at a press briefing after the South Korean central bank maintained its seven-day repurchase rate at 3.5% Thursday.

The monetary policy outcome was forecast by all 18 economists surveyed by Bloomberg. The rate has been unchanged since the BOK board last hiked interest rates in January. 

Markets were largely unmoved by the widely expected decision. Even the first sign of divergence in views at the central bank — one board member raised the possibility of a cut — did little to convince market players that South Korea has any policy change in the pipeline until there are signs of a change in tide in the US monetary policy stance.

“We’re likely to see a wait-and-see mode from the BOK at least until the first quarter of next year,” said Kang Seung Won, an analyst at NH Investment & Securities. “There’s little justification yet for the governor to push for change, especially with the Federal Reserve offering no signals that its tightening cycle is over.”

The BOK has been stuck in a holding pattern all year as it tries to balance the need to contain resurgent inflation and rising household debt while keeping the economy ticking over and waiting for developments at the Fed. The latest hostilities in the Middle East now add to the complications, strengthening the case for caution.

Rhee said he had hoped to strike a more optimistic tone at the meeting before the conflict erupted.

“It’s still hard to tell if this is just the calm before a storm,” Rhee said, pointing to the possibility of a wider market fallout from the hostilities. The board would seriously consider a hike if the Mideast conflict causes inflation expectations to rise more than forecast, he added.

While the board has maintained for months a united front on the need to keep open the possibility of raising borrowing costs if needed, Rhee said that at Thursday’s meeting one member flagged the possibility of also lowering interest rates if required over the next three months. 

That’s the first sign of divergence from the BOK’s long-running hawkish threat that it may raise rates if deemed necessary, even though all members still see a chance they may need to raise rates. The decision to hold rates was unanimous, Rhee said.

South Korea’s 10-year bond yield edged up about one basis point to 4.38% after Rhee flagged the heightened uncertainties due to the Israel-Hamas conflict. Korea’s currency was largely unchanged, with the dollar trading above 1,358 won.

Despite Rhee’s comments on the possibility of a rate hike indirectly resulting from the conflict, bond traders continue to see the next eventual move in the other direction.

“Rhee’s remarks were enough to keep the bond market on the edge,” said Kong Dongrak, an economist at Daishin Securities Co. “The central bank avoided giving any direct policy signals citing heightened uncertainty, and that makes it even more difficult to gauge when the BOK will start lowering rates.”

The BOK characterizes its own policy as restrictive and reiterated its view that settings would remain that way for a considerable time. The central bank wants to see the inflation rate settle into the 2% range — an outcome it expects to see next year.

Consumer prices advanced 3.7% last month from a year earlier, a quicker pace than the 3.4% recorded in August, but authorities see inflationary pressure easing from this month, with price growth slowing to the low-3% range by year-end. Still, the conflict has increased upside risks for inflation through its impact on oil prices and exchange rates, the bank said.

Uncertainty over the outlook for Fed policy remains as one of the key factors why the BOK is keeping the door open to the possibility of tightening further. While investors expect the Fed to hold rates steady at its meeting concluding on Nov. 1, they also predict US policymakers will refrain from declaring a peak to their tightening cycle.

The yawning rate differential between the two nations has continued to batter the won. South Korea’s currency is the worst performing Asian currency against the dollar after the yen and the Malaysian ringgit so far this year.

A resurgence in household debt levels is another concern supporting the case for a hawkish bias, as the central bank considers excessive borrowing a longer-term threat to economic prosperity.

Rhee warned against relying too much on leverage to buy a home given the costs of financing a purchase are unlikely to “drop any time soon.” 

What Bloomberg Economics Says…

“Policymakers face elevated uncertainty from the impact of the Israel-Hamas war and the implications of higher US long-term yields. This adverse external environment will make for a more difficult balancing act between supporting the economy and ensuring price and financial stability.”

— Hyosung Kwon, economist

For the full report, click here.

He reiterated that household debt is a long-term risk for the economy and the BOK is in lockstep with the government on the need to prevent the property market from “overshooting” after authorities stepped in earlier this year to ease the housing correction.

“Rhee overall struck a hawkish tone with a signal that the rate could stay higher for longer,” said Yoon Yeo-sam, an analyst at Meritz Securities Co. in Seoul. “Still, a board member also wanting an option to lower rates underscores how much the extent of economic uncertainties has grown.”

–With assistance from Shinhye Kang and Emily Yamamoto.

(Adds details from BOK Governor Rhee’s press briefing.)

More stories like this are available on

©2023 Bloomberg L.P.