Monetary policy to be tightened to curb rising household debt: Bank of Korea

Bank of Korea Deputy Governor Park Jong-seok speaks during an online press conference at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

The country's central bank did not hide its intention of implementing additional interest rate hikes this year, insisting again that a gradual tightening of its monetary policy will help slow down the pace of snowballing household debt and soaring housing prices.

But as widely expected, the Bank of Korea did not mention the timing and scope of the additional rate hikes, while the country's bond market is weighing the possibility of the bank raising its key rate in October.

“We can say for sure that the benchmark rate hike will generate meaningful effects in terms of controlling the pace of the sharp rise in housing prices and household debt, but the level of the effects will depend on the market circumstances, so we need to keep paying attention,” Park Jong-seok, the bank's deputy governor, told reporters during a press conference, Thursday.

Right after its decision to raise the key rate by 25 basis points to 0.75 percent last month, the BOK and financial authorities sent a signal to the market that it was ready to raise the rate once more to 1 percent sometime around the end of this year.

In a monetary policy report released Thursday, the BOK did not change its stance toward an additional rate hike, citing the widening financial imbalance, due to the impact of the COVID-19 pandemic since last year.

But the bank said that if the fourth wave of the pandemic has a serious impact on the economy and drives down the growth outlook for the GDP, it will reconsider an additional rate hike. The nation's average housing price surged by 14.3 percent in July, compared to a year ago. The total household debt also increased by 9.8 percent during the same period, according to data provided by the BOK.

A mismatch of the supply and demand for apartments in the Seoul metropolitan area has resulted in an unprecedented rise in home prices during the past year. The government's continued regulations and near-zero interest rate also sparked a loan-financed buying spree of apartments here among younger people, which ended up raising home prices further.

But Park underscored that the extra rate increase can be feasible only under the assumption that the economy continues its solid recovery momentum throughout this year.

“The timing of the readjustment of our monetary policy will depend on the future course of economic growth, prices and financial imbalance here,” Park said. “One major precondition for our additional rate hike is the economy's robust recovery.”

Despite the ample market liquidity, an additional rate hike will have a grave impact, particularly on the self-employed and small business owners, who have already been hit very hard by declining sales due to the pandemic.

Reflecting on their difficulties, the BOK has also decided to extend its support for the self-employed and small business owners by six months until the end of March 2022. On the same day, the central bank's monetary board also authorized the injection of 3 trillion won ($2.56 billion) to support the self-employed.

Under the program, local banks have provided special loans and interest benefits for the self-employed and small business owners, rolling over their debt deadlines until the end of September. But with the Delta variant of the coronavirus making it impossible to scale down the current social distancing measures that limit gatherings and business operating hours, the financial authorities and banks are facing mounting calls to extend the debt deadlines for another six months.