■ An increase in the KRW/USD rate driven by dollar strength exerts short-term upward pressure on consumer prices, but its persistence and pass-through are more limited than when driven by domestic factors.

- The impact of dollar-driven KRW/USD fluctuations on import prices diminishes with time, while that of domestic drivers gradually strengthens.

- Both dollar and domestic factors have similar short-term effects on consumer prices, but the impact driven by domestic factors becomes more pronounced over time.

■ Analysis of recent KRW/USD fluctuations shows a significant influence from dollar factors on consumer prices. Scenario analysis suggests that, unless
the exchange rate rises sharply, inflation will likely not significantly exceed the Bank of Korea’s 2% target.

- If the exchange rate rises to 1,500 won per dollar, inflation rates are projected to increase by up to 0.24%p relative to Q1. If it falls to 1,400 won, inflation rates are projected to decrease by up to 0.44%p relative to Q1.

· If the exchange rate falls, it could exert downward pressure on consumer prices in 2026.

- With Q1 inflation rate at 2.1% and demand-side pressures remaining subdued, a rise in the exchange rate to around 1,500 won is unlikely to push the inflation rate significantly above the 2% target.

■ The finding that the impact of exchange rate fluctuations on import and consumer prices varies by underlying driver has implications for policy responses
to exchange rate volatility.

- Policy should respond to the magnitude and persistence of inflationary effects, adjusting based on the underlying driver, rather than to the exchange rate itself.

- When driven by dollar strength, the effects may be short-lived, which monetary policy should take into account.

- However, a prolonged increase in the exchange rate or growing influence of domestic factors could sustain inflationary pressures. Macroeconomic
policy should closely monitor exchange rate trends and their underlying drivers.