Korea predicted to be badly hurt by Iraq conflict

Inflation and imports to go up.

According to DBS, international oil prices have surged this month due to military conflicts in Iraq. The WTI and Brent crude prices respectively rose 3% and 4% month to date, touching the highest levels over nine months.

The rise in oil prices poses a non-negligible risk for Korea, an economy that highly relies on energy consumption and energy imports.

Here's more from DBS:

The resultant impact on the economy will be showed up in June data. Trade and inflation, the first batch of June data, will be released soon next week.

Headline CPI inflation is likely to rise 0.2-0.3ppt from the previous month, hitting the 2% mark one month earlier than we originally projected.

The import bill will be inflated too. Growth of all import goods will likely accelerate to 9.4% YoY (10.8% in June 1st-20th), a big jump from 0.3% in May.

The rise in imported inflation will inevitably erode the spending power of domestic consumers. We have been expecting a consumption-led economic recovery from 3Q onwards as the interruption impact from April ferry disaster will diminish.

If the strong uptrend in international oil prices were to continue in the coming months, the growth recovery we have expected would be deferred.

Nevertheless, a delayed recovery doesn’t mean the Bank of Korea (BOK) will cut rates to support. The rise in inflation numbers and the weakness in growth data present a dilemma for the central bank. Maintaining status quo on monetary policy remains the best option, in our view.