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Seoul, March 26 (IANS) Market interest rates could face significant upward pressure if the conflict in the Middle East persists amid rising inflationary pressures and growing concerns about global monetary tightening, the central bank said on Thursday.

The Bank of Korea (BOK) issued the warning in its latest financial stability report, as U.S.-Israeli strikes on Iran that began late last month have escalated into a broader regional conflict, reports Yonhap news agency.

"If tensions in the Middle East persist, market interest rates could face upward pressure as rising oil prices intensify supply-side inflationary pressures and heighten concerns about global monetary tightening," the BOK said.

"Disruptions to the energy supply chain could lead to higher international energy prices, affecting both inflation and economic growth," the report added, noting that heightened risk-aversion sentiment would likely amplify volatility across the domestic foreign exchange and financial markets.

The conflict has driven global oil prices higher due to the effective closure of the Strait of Hormuz, disrupting international supplies. South Korea relies on imports for about 98 percent of its fossil fuels and obtains roughly 70 percent of its crude oil from the Middle East, according to industry and government data.

"If Middle East tensions persist, foreign investors' preference for safe-haven assets would likely continue, which could limit any easing of volatility in stock prices and exchange rates," the report said.

The Korean won weakened significantly against other major currencies amid risk-aversion sentiment and broad dollar strength.

The BOK also cautioned that a prolonged crisis could affect corporations, with higher energy costs potentially reducing profitability and weakening debt repayment capacity for vulnerable firms.

"Given the heightened uncertainty surrounding the conflict, it is necessary to enhance monitoring and risk management of foreign exchange and financial markets, as well as vulnerable sectors. Authorities should strengthen coordination to implement timely market stabilization measures if needed," the BOK said.

At its latest rate-setting meeting in February, the BOK kept its benchmark interest rate steady at 2.5 percent, marking the sixth consecutive hold. Analysts expect the central bank to maintain a prolonged pause to support financial stability.

--IANS

na/