The Bank of Korea has officially cited "demand-side pressures" as a driver of inflation for the first time since the Middle East conflict began. BOK Governor Shin Hyun-song pointed to Samsung Electronics' performance bonuses as an example, saying, "When wages boost demand through increased purchasing power, price pressures arise accordingly."
The BOK's Monetary Policy Board, while holding the benchmark interest rate at 2.50% on Wednesday, stated in its monetary policy decision statement that "going forward, inflation is expected to expand further as the spillover effects of rising international oil prices broaden, while demand-side pressures from rising incomes also gradually increase." This phrasing was absent from the previous policy statement in April.
At that time, the BOK had placed the weight of its inflation assessment on rising international oil prices stemming from the Middle East situation — that is, on supply-side shocks. Unlike during the Russia-Ukraine war in 2022, the central bank had judged that the current Middle East shock posed greater risks on the crude oil supply side than on the demand side. However, the BOK now assesses that wage- and income-driven demand pressures, exemplified by the semiconductor boom and Samsung Electronics' performance bonuses, have emerged as a new inflation variable.
Governor Shin's remarks reflect this shift in perception. At the press briefing following the policy decision, when asked whether Samsung Electronics' performance bonuses could translate into inflationary pressure, he replied, "When wages boost demand through increased purchasing power, price pressures arise accordingly." He added, "There is also income tax on performance bonuses, so there will be a trickle-down effect from that, which is expected to materialize next year."
A BOK official explained, "In April, attention was focused on the Middle East situation, so it was not the time to discuss demand-side pressures. We now believe the worst phase that we had been concerned about has passed, and this also reflects the significantly upward revision of the growth outlook."
Still, some in the market interpret that the BOK has not entirely shifted the center of gravity of inflation drivers to the demand side. At a briefing on its revised economic outlook the same day, the BOK said, "The main driver of current inflation remains the Middle East situation and the oil price shock."
