Households, companies can afford financial burden from further rate hike: Bank of Korea

Bank of Korea Deputy Governor Lee Sang-hyeong speaks during a press conference at its headquarters in Seoul, Friday. Courtesy of Bank of Korea

By Lee Min-hyung

The country's central bank is moving towards justifying its rationale for an additional rate hike this year, after a senior bank official underscored the need for such a future hike, claiming that households and companies will be able to withstand the interest burden from further monetary tightening.

“The slight rate hike will have a limited impact on the debt burden of the self-employed,” Bank of Korea (BOK) Deputy Governor Lee Sang-hyeong told reporters in a press conference, Friday.

According to a financial stability report released by the central bank, each individual loan borrower here will have to pay about 300,000 won ($255) more annually in interest payments at the end of 2021, compared to a year earlier, under the scenario that the bank raises the key rate to 1 percent before the end of the year, from the current 0.75 percent.

The monetary authority argued that households, companies and financial institutions can afford the increased interest burden, though. Therefore, it is likely to be desirable for the BOK to move forward with a further rate hike as a way to get the surging total amount of household debt under control and to reduce the widening financial imbalance here.

The BOK lowered the key rate down to a record low of 0.5 percent in May 2020 during the pandemic, but stopped the prolonged monetary easing stance in August by raising the rate by 25 basis points.

Korea's benchmark rate still remains at a low level, even if the key rate is raised to 1 percent, and the interest burden from households is less serious than before the pandemic erupted, according to the report. BOK Governor Lee Ju-yeol has been consistent in reiterating the need to continue normalizing the monetary policy on fears over what the central bank considers a worrying level of household debts.

Earlier, the BOK remained hesitant over raising the benchmark rate because of concerns that doing so might add more financial pressure to the self-employed and small business owners, two of the most vulnerable groups hit hardest by the pandemic-induced economic doldrums.

But the current belief is that, as Korea's vaccination rate is on the rise, their sales will be on track for a gradual recovery based on revitalized private spending, according to the central bank. During the conference, the deputy governor Lee shared its plan in terms of expanding financial support of vulnerable groups and coming up with a set of policies to widen selective support for them.