Citi Sees BOK Raising Rate Toward 3% This Year on Inflation Risk

Article content

(Bloomberg) — The Bank of Korea is likely to raise its policy rate to 3% this year as a surge in global oil prices drives inflation higher, according to Citigroup Inc. 

Article content

The central bank is expected to deliver two 25 basis-point hikes — one in July and a second in October — bringing the benchmark rate near 3%, Jin-Wook Kim, a Citigroup economist, wrote in a note Wednesday. Those moves would mark a renewed tightening cycle following a prolonged hold, as price pressures prove more persistent than previously anticipated, the economist added.

Article content

Article content

Article content

Brent crude could climb as high as $110 to $120 a barrel in the near term amid disruptions tied to the Iran conflict, before easing later in the year, Citi said. The spike — equivalent to as much as a 20% increase from already elevated oil prices over the next 12 months — is seen as having a greater impact on inflation than on growth.

Article content

Article content

“Asymmetrically pronounced impacts of higher oil prices on inflation would incentivize the BOK to act more hawkish, especially given historically accommodative financial conditions,” Kim said.

Article content

Citi raised its 2026 inflation forecast to 2.6% from 2.3%, while trimming its growth outlook slightly to 2.2%, saying strong semiconductor shipments, and the potential supplementary for a supplementary budget will help cushion the economy. The output gap is seen remaining slightly negative through the second half of next year before turning positive in early 2027, the note said. 

Article content

Inflation dynamics are expected to deteriorate more quickly. Kim forecasts headline inflation will hover around 3% between April and September next year, while core inflation remains in the mid-2% range into 2027 as energy costs feed through with shorter lags than in previous cycles. Utility prices are also likely to increase later in the year as pricing buffers are unwound.

Article content

Article content

The South Korean government imposed a price cap on gasoline, diesel and kerosene last week for the first time in about three decades after the war in Iran sent energy prices soaring. The Asian nation is particularly vulnerable to volatile oil and gas prices as it imports almost all of its energy supplies. 

Article content

Kim said government measures, including fuel tax cuts and price caps, may tame near-term price spikes, but are unlikely to change the broader inflation trajectory.

Article content

In the near term, the BOK is expected to stay on hold as it monitors financial stability risks and global volatility, particularly ahead of Korea’s inclusion in the World Government Bond Index in April.  

Article content

BOK board member Lee Soohyung said Tuesday that outlook should change from the bank’s projections in February, as it faces upside risks to inflation, while growth is subject to downward pressures. 

Article content