Impact of the U.S.-Iran Conflict on South Korea's Economy and Monetary Policy

The ongoing conflict between the United States and Iran has significantly influenced South Korea's economic outlook, prompting the Bank of Korea (BOK) to maintain its key interest rate at 2.50% for the seventh consecutive time as of April 10, 2026. This decision reflects the BOK's cautious approach in light of rising inflation and economic uncertainty stemming from the Middle East crisis. The won-dollar exchange rate fluctuated dramatically, initially surging to the 1,500 won range before stabilizing around 1,470 won following a temporary ceasefire agreement between the U.S. and Iran.

The Korean won started higher against the U.S. dollar on expectations that a cease-fire in the war b. .

Governor Lee Chang-yong of the BOK emphasized the need for careful monitoring of the geopolitical situation, stating that the current economic conditions necessitate a freeze on interest rates to assess the potential ripple effects of the conflict. The BOK has revised its inflation forecast upward, anticipating it to rise to the mid-to-upper 2% range, while economic growth is now expected to fall below 2%, a downgrade from earlier projections.

The BOK's decision to maintain the interest rate is attributed to several factors, including uncertainties related to household debt, housing prices, and the impact of rising oil prices on inflation. The organization noted that the economic sentiment has weakened due to production disruptions in some industries, despite strong semiconductor exports and a supplementary budget aimed at stimulating growth.

BOK: Middle East War to Push Korea Growth Below 2%, Inflation Well Above 2.2%

The won's depreciation has been linked to foreign net selling of Korean stocks, which amounted to $47.9 billion from January to April 2026. Governor Lee indicated that if the situation in Iran stabilizes, the exchange rate could decrease as rapidly as it rose. He highlighted that the current account surplus provides ample foreign currency liquidity, which could facilitate capital inflows if geopolitical tensions ease.

Despite the BOK's efforts to stabilize the economy, there are concerns regarding the potential for stagflation—where inflation rises alongside stagnant economic growth. Critics argue that the prolonged geopolitical instability could exacerbate inflationary pressures and hinder economic recovery. The BOK's approach has been scrutinized for its reliance on monitoring external conditions rather than proactive adjustments to monetary policy.

BOK: Middle East War to Push Korea Growth Below 2%, Inflation Well Above 2.2%

Looking ahead, the BOK plans to continue evaluating the economic landscape, particularly in relation to the Middle East conflict and its implications for inflation and growth. Governor Lee noted that future monetary policy decisions will be contingent on developments in the geopolitical arena, as well as domestic economic indicators. The BOK aims to balance the need for inflation stabilization with the imperative of ensuring financial stability amidst ongoing uncertainties.

BOK: Middle East War to Push Korea Growth Below 2%, Inflation Well Above 2.2%

In summary, the U.S.-Iran conflict has introduced significant volatility into South Korea's economic environment, compelling the BOK to adopt a cautious stance on monetary policy while navigating the complexities of inflation and growth in a challenging geopolitical context.