Expectations for an end to the war are growing as the United States and Iran are reportedly close to signing a memorandum of understanding (MOU) to end hostilities. U.S. President Donald Trump said Wednesday that he had reached "a wonderful agreement regarding the war with Iran," adding that "it will be finalized within a few days." According to foreign media, the MOU includes a halt to fighting on all fronts, the reopening of the Strait of Hormuz, and an easing of U.S. sanctions on Iran. Some observers expect the two countries to sign an agreement laying out a roadmap to end the war as early as the 14th of this month. Iran's Ministry of Foreign Affairs, while denying that a final decision had been made, said that a major part of the agreement had been completed. Although significant uncertainty remains, momentum is building behind the possibility that the war, which has shaken the global energy supply chain and economy since it began on Feb. 28 this year, may find an exit after some 100 days.
As significant as the remaining variables is the war's aftermath, which is likely to persist even after the conflict ends. Even after the war ends, normalizing energy transport and supply chains is expected to take at least several months, raising the likelihood that the won-dollar exchange rate, which has far exceeded 1,500 won, and inflation, which already rose into the 3-percent range in May, will remain elevated for a considerable period. The inflation burden has grown so large that food and housing costs for a four-person household reached 2 million won per month in the first quarter of this year, making it the biggest pressure factor on the livelihood economy. In response, Bank of Korea Governor Shin Hyun-song repeatedly hinted at a rate hike Thursday, saying, "We need to raise interest rates without delay, with a focus on price stability." However, if interest burdens grow as the base rate rises, investment and consumption could shrink, and vulnerable groups could be pushed to the brink. The possibility cannot be ruled out that household loans, which have approached 2,000 trillion won amid a surge in "debt-fueled investing," could go bad and lead to instability in the financial system.
The battle against the "three highs" — high inflation, high exchange rates, and high interest rates — begins now. To avoid being swept away by the wave of the three highs bearing down on our economy, the government's top priority is to manage financial risks and stabilize people's livelihoods by responding preemptively to soaring prices, surging debt, and exchange rate volatility. To do so, a sophisticated policy mix from fiscal and monetary authorities is essential. While selective support for vulnerable groups should be strengthened, caution is needed regarding expansionary fiscal policies that could stoke inflation. President Lee Jae-myung said, "Without price stability, economic growth, the improvement of polarization, and the nation's sustainable development are all impossible." The government's policy capabilities have been put to the test in managing the compound crisis of the three highs.
