Ample liquidity, hopes for economic recovery to offset inflationary fears

U.S. President Joe Biden speaks after the Senate approved a $1.9 trillion virus relief plan, at the White House in Washington, D.C., Saturday. Reuters-Yonhap

By Lee Min-hyung

Ample liquidity and rising hopes for a post-coronavirus economic recovery will offset escalating inflationary fears amid rising interest hikes, market experts said Monday.

The Bank of Korea (BOK) and financial authorities here have placed top priority on revving up the economy this year despite concerns over inflation-driven bubbles in the nation's asset market.

Economists here remained optimistic for the economy to achieve a major rebound in 2021 under the precondition that the coronavirus threat diminishes gradually and any possible COVID-19 mutations do not bring any further economic damage.

They argued the fear of inflation is a secondary issue to resolve, and the top priority should be on boosting the economy and thereby achieving a recovery in employment.

"I don't believe the inflation concern is serious enough for the government to take immediate action," Sejong University economist Kim Dae-jong said. He believes the government needs to focus on normalizing the economy from the virus-induced doldrums.

On Saturday, the U.S. Senate approved a $1.9 trillion (2,152 trillion won) coronavirus relief package, boosting expectations for economic revitalization in the world's largest economy.

The unprecedented level of fiscal stimulus by the U.S. government will theoretically come as inflationary pressure on the U.S. economy and give a boost to the U.S.' rising 10-year treasury yield. Global financial firms such as ING and BNP Paribas share the outlook that yields will keep rising at a rapid pace to reach up to 2 percent by the end of 2021.

Korea's 10-year bond yield also topped the 2 percent mark on March 5, for the first time in about two years since March 2019. As the nation's treasury yields move in tandem with those from the U.S., the super-expansionary policy from the world's largest economy is expected to keep driving up Korea's overall market interest rates, even if the benchmark rate remains unchanged at a record-low level of 0.5 percent.

But the rises in the treasury yields both in Korea and the U.S. do not display any signals over the fear of inflation, according to the economist.

"U.S. Treasury Secretary Janet Yellen recently said the rising treasury yields are a sign of economic recovery, and my view is the same," he said. "The inflation rate here is not at a worrying level as of now. The Korean economy will likely bounce back from last year's contraction on the expansionary fiscal policy from the government."

Bank of Korea Governor Lee Ju-yeol speaks during a press conference at its headquarters in Seoul, Feb. 25. Yonhap

The interest hike, however, is expected to discourage retail investors' appetite for the year-long craze into investment in the stock and real estate markets here. Ever since the outbreak of COVID-19 early last year, people from all walks of life here have jumped into buying the two assets by using mortgage and non-collateral loans amid an ever-growing inflationary fear.

Experts advise new investors to remain careful before making what is considered a belated investment by taking loans with higher interest rates than before.

"The U.S. treasury hike has a lot to do with the rise in Korea's interest rates," Korea Capital Market Institute macroeconomist Kang Hyun-ju said. "Variable interest rates will be on the rise in the foreseeable future in line with a series of expansionary signals from the U.S."

According to data from the Bank of Korea, commercial lenders have in recent months increased interest rates for mortgage and non-collateral loans offered to households here. The average interest rate for mortgage loans is on the steep rise to 2.63 percent as of January 2021, up by 0.19 percentage points from last September. That of non-collateral loans ― commonly called credit loans here ― is also rising at a rapid pace to have reached 3.46 percent, up by more than 50 basis points from 2.89 percent during the same period.

"Banks will keep hiking interest rates, so this will pose a burden to new and existing borrowers," the economist said. "For instance, those who obtain a property will have to pay more for their possession tax amid the interest rate hike, and those who plan to purchase property will also be under pressure to pay more monthly interest."

Even if households do not welcome the U.S.-sparked interest rate hike, this comes as a boon for most commercial banks here, as they will be able to anticipate higher profitability as early as the first quarter of this year.

Most brokerage houses are revising up target stock prices of major lenders due to such favorable external factors.

"There stands an ample chance that banks' net interest margins will achieve a major rebound due to the widening gap in interest rates between loans and deposits," said Jun Bae-seung, an analyst at eBest Investment & Securities. "Starting from the first quarter of this year, banks will report robust earnings and investors are advised to pay more attention to their performances."

Banks are also expected to keep enjoying more stable profits in their loan-to-deposit margin on the rising interest rates after the Financial Services Commission's planned announcement this month of measures to control the worrying level of household debt, according to him.

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