Business owners set to be affected by rising lending rates, consumer prices
By Kim Bo-eun
The government is drawing up another 14 trillion won ($11.7 billion) budget to support small business owners afflicted by the COVID-19 pandemic, but ironically, it is feared that the extra budget will add yet more of a burden to affected households and businesses, as the situation is set to trigger a rise in lending rates as well as consumer prices.
The extra budget will be used to provide 3 million won to 3.2 million small business owners who have been hit by the effects of the COVID-19 pandemic and ongoing social distancing measures on businesses. The government is seeking to issue 11.3 trillion won in debt to finance the 14-trillion-won budget, which will be done by issuing government bonds.
The situation has led to a rise in treasury bond yields. The three-year treasury bond yield rose 0.091 of a percentage point on Jan.14, when the government unveiled its 14-trillion-won extra budget plan, and jumped 0.104 of a percentage point the following trading day on Jan. 17, hitting the highest yield ― at 2.148 percent ― since June 2018.
Signs of instability in the market had already appeared in October following the series of emergency budgets that were drawn up, as the three-year treasury bond yield rose to over 2 percent, for the first time in three years. This increase led the Ministry of Economy and Finance to buy back 2 trillion won worth of government bonds.
The rise in treasury bond rates is triggering concerns, given that it will lead to a subsequent rise in loan interest rates. The Cost of Funds Index (COFIX), which serves as the benchmark lending rate for mortgages, is calculated based on eight commercial banks' data on securing funds, which include the costs of regular installment savings, certificates of deposits and bank debenture ― and all of these are affected by treasury bond yields.
Thus, a rise in treasury bond yield will lead to a rise in the COFIX rate, which in turn will result in a rise in lending rates. The rise in lending rates will end up burdening households and business owners who will have to pay greater interest on their loans.
The extra budget will provide greater liquidity, which will also result in further inflationary pressure, at a time when the government has been fighting against rising prices.
The Bank of Korea raised the key rate by 25 basis points to 1.25 percent earlier this month. According to the BOK, Korea's consumer price inflation will come to the mid-3-percent range in the next few months.
"Monetary authorities are currently seeking to absorb excess liquidity, but prices are set to rise from the upcoming extra budget to be executed," Institute for Global Economics Chairman Jun Kwang-woo said.
"The underprivileged are the most vulnerable to high inflation. They will also be burdened, as the interest rates for loans made during the pandemic are set to grow. Small business owners are in need of support, but the government's methods to offer support somewhat do not make sense," Jun added.
Kim Dae-jong, a Sejong University professor of business administration, said, "The government's policies should show consistency and predictability, but an extra budget plan drawn up 50 days ahead of the presidential election can only be seen as a populist measure."
By Kim Bo-eun
 |
| Finance Minister Hong Nam-ki speaks about the government's 14-trillion-won ($11.7 billion) extra budget plan at the Seoul Government Complex, Jan. 21. Newsis |
The extra budget will be used to provide 3 million won to 3.2 million small business owners who have been hit by the effects of the COVID-19 pandemic and ongoing social distancing measures on businesses. The government is seeking to issue 11.3 trillion won in debt to finance the 14-trillion-won budget, which will be done by issuing government bonds.
The situation has led to a rise in treasury bond yields. The three-year treasury bond yield rose 0.091 of a percentage point on Jan.14, when the government unveiled its 14-trillion-won extra budget plan, and jumped 0.104 of a percentage point the following trading day on Jan. 17, hitting the highest yield ― at 2.148 percent ― since June 2018.
Signs of instability in the market had already appeared in October following the series of emergency budgets that were drawn up, as the three-year treasury bond yield rose to over 2 percent, for the first time in three years. This increase led the Ministry of Economy and Finance to buy back 2 trillion won worth of government bonds.
The rise in treasury bond rates is triggering concerns, given that it will lead to a subsequent rise in loan interest rates. The Cost of Funds Index (COFIX), which serves as the benchmark lending rate for mortgages, is calculated based on eight commercial banks' data on securing funds, which include the costs of regular installment savings, certificates of deposits and bank debenture ― and all of these are affected by treasury bond yields.
Thus, a rise in treasury bond yield will lead to a rise in the COFIX rate, which in turn will result in a rise in lending rates. The rise in lending rates will end up burdening households and business owners who will have to pay greater interest on their loans.
The extra budget will provide greater liquidity, which will also result in further inflationary pressure, at a time when the government has been fighting against rising prices.
The Bank of Korea raised the key rate by 25 basis points to 1.25 percent earlier this month. According to the BOK, Korea's consumer price inflation will come to the mid-3-percent range in the next few months.
"Monetary authorities are currently seeking to absorb excess liquidity, but prices are set to rise from the upcoming extra budget to be executed," Institute for Global Economics Chairman Jun Kwang-woo said.
"The underprivileged are the most vulnerable to high inflation. They will also be burdened, as the interest rates for loans made during the pandemic are set to grow. Small business owners are in need of support, but the government's methods to offer support somewhat do not make sense," Jun added.
Kim Dae-jong, a Sejong University professor of business administration, said, "The government's policies should show consistency and predictability, but an extra budget plan drawn up 50 days ahead of the presidential election can only be seen as a populist measure."
