Israel-Hamas conflict to deepen inflation woes

The conflict between Israel and Hamas militants in the Gaza Strip has raised concerns for the Korean economy as the prospect of a full-blown war in the Middle East could lead to a surge in oil prices and further pave the way for more inflationary pressures.

"Though the international financial market has shown a limited response to the incident, considering it is still in the early stages, the uncertainties are very high," Finance Minister Choo Kyung-ho said at a meeting held Tuesday before he left Korea to attend the Group of 20 summit held in Morocco.

"As international oil prices jumped following the crisis, the volatility could escalate as the situation unfolds," Choo said, calling for related authorities to closely monitor the situation to prevent an energy crisis from happening.

He further stressed on the need for price control as surging energy prices could lead to inflationary pressures on the economy.

Financial authorities, including the Financial Services Commission and Financial Supervisory Service, are bracing for possible shocks from the capital market as well.

The tension between Israel and the Gaza Strip could lead to a global energy crisis if it develops into a conflict for the whole Middle Eastern region, reaccelerating inflation, market watchers warned.

“The impact from the crisis will be reflected on the market depending on the flow of oil prices,” Sung Tae-yoon, an economics professor at Yonsei University, said. “We will have to see how the conflict influences oil prices, impacting inflation and eventually the US bond yields.”

Iran’s involvement in the Hamas ambush would be a crucial variable for the oil market, Lim Hwan-yeol, economist at Shinhan Securities, pointed out, though Iran has denied any claims it was behind the attacks.

"If Iran is behind (the attacks), the US will get involved, strengthening the upward pressure on oil prices,” he said.

If the war leads to higher oil prices and inflationary pressures, it could prolong the US Federal Reserve's aggressive monetary tightening, strengthening the US dollar's safe haven appeal.

This would lead to weaker investor sentiment for emerging countries, including South Korea, which is already pressured by the 2 percentage points rate gap with the US.

Yet, some projected limited impact from the crisis.

“Though the stock market will be affected by the uncertainty from the tension in the Middle East, this will not lead to huge changes for share prices, inflation or the Fed’s policy stance,” analyst Han Ji-young from Kiwoom Securities said. “Unless this conflict develops into something larger affecting direct involvements from Iran or Saudi Arabia, the shock will be limited.”

As Han said, despite the rising geopolitical concerns, the local currency slightly strengthened against the US dollar on Tuesday. It closed at 1,349.5 won, down 0.4 won from the previous session's close. It even reached the 1,350-won box as dovish comments from the US Fed officials kindled hope that the Fed may not go for a rate hike in its next rate-setting meeting.

Though the Seoul stock market remained stable at opening as it tracked gains from Wall Street, it saw losses later in the day following rising tensions in the Middle East.

The benchmark Kospi closed at 2402.58 points, 0.26 percent lower than the previous closing price. The secondary bourse Kosdaq experienced a dip, closing at 795 points, 2.62 percent lower. It was the first time in seven months for the index to go below the 800-point level, as secondary battery-related shares suffered losses.