Measures needed to ease debt burden
The Bank of Korea (BOK) is likely to raise its key interest rate soon as the economy is on a robust recovery track. BOK Governor Lee Ju-yeol has repeatedly stressed the need for a rate hike to ensure financial stability and check inflationary pressure. Now, the question is when and by how much the BOK will ramp up the rate.
Some market participants said there is a strong chance that the BOK will start raising the benchmark rate this month. They also expect another rate hike in October or November. An increase of 0.25 percentage points is predicted each time. Simply put, the time is ripe for a higher interest rate considering all the economic and financial factors the country now faces.
The BOK lowered its key rate by a combined 0.75 percentage points to a record low 0.5 percent between March and May last year to stimulate the economy hit by the COVID-19 pandemic. Since then, it has left the rate unchanged for nearly 15 months in the face of the unprecedented public health crisis.
But, the central bank seems to think that it can no longer delay making an upward adjustment. Members of the BOK's rate-setting Monetary Policy Board recognized the need for a rate hike during their meeting on July 15, although they agreed to keep the current rate intact citing risks arising from the fourth wave of the pandemic.
It is worth noting that President Moon Jae-in nominated Koh Seung-beom, a hawkish member of the Monetary Policy Board, to lead the Financial Services Commission (FSC), Thursday. This nomination could signal that the Moon administration is opting for monetary tightening. Koh strongly insisted on a rate increase in order to stabilize the volatile financial market during last month's policy board meeting.
There are many legitimate reasons to shore up the interest rate. First, the country is confronting mounting inflationary pressure. According to Statistics Korea, the consumer price index jumped 2.6 percent year-on-year in July. It has remained above the BOK's inflation target of 2 percent for four months in a row. The soaring prices were mainly due to higher prices of farm and oil products. But they are feared to rise further during the rest of the year.
Another reason is the surging household debt, which totaled 1,765 trillion won ($1.54 trillion) as of March 31, up 9.5 percent from the year before. We cannot overlook the seriousness of the debt load, which has already become a ticking bomb. It is urgent to take measures to prevent potential mass defaults which could lead to a collapse of the banking system in a worst-case scenario.
More worrisome are asset bubbles forming in the housing market. Home prices have continued to skyrocket since President Moon took office in May 2017. The government's expansionary fiscal policy and the BOK's monetary easing in the wake of the coronavirus outbreak in 2020 have added fuel to the fire. According to a KB Kookmin Bank survey, apartment prices jumped 9.97 percent nationwide and 12.97 percent in Seoul and the surrounding metropolitan area in the first half of the year.
In this situation, an interest rate hike is inevitable. Pre-emptive action is more than necessary to prevent the burst of asset bubbles, curb inflation, avoid a debt crisis and achieve financial stability. However, a rate increase will raise the debt repayment burden on households and businesses, especially financially-strapped small business owners. Thus, it is necessary to take comprehensive measures to ease their burden.
The Bank of Korea (BOK) is likely to raise its key interest rate soon as the economy is on a robust recovery track. BOK Governor Lee Ju-yeol has repeatedly stressed the need for a rate hike to ensure financial stability and check inflationary pressure. Now, the question is when and by how much the BOK will ramp up the rate.
Some market participants said there is a strong chance that the BOK will start raising the benchmark rate this month. They also expect another rate hike in October or November. An increase of 0.25 percentage points is predicted each time. Simply put, the time is ripe for a higher interest rate considering all the economic and financial factors the country now faces.
The BOK lowered its key rate by a combined 0.75 percentage points to a record low 0.5 percent between March and May last year to stimulate the economy hit by the COVID-19 pandemic. Since then, it has left the rate unchanged for nearly 15 months in the face of the unprecedented public health crisis.
But, the central bank seems to think that it can no longer delay making an upward adjustment. Members of the BOK's rate-setting Monetary Policy Board recognized the need for a rate hike during their meeting on July 15, although they agreed to keep the current rate intact citing risks arising from the fourth wave of the pandemic.
It is worth noting that President Moon Jae-in nominated Koh Seung-beom, a hawkish member of the Monetary Policy Board, to lead the Financial Services Commission (FSC), Thursday. This nomination could signal that the Moon administration is opting for monetary tightening. Koh strongly insisted on a rate increase in order to stabilize the volatile financial market during last month's policy board meeting.
There are many legitimate reasons to shore up the interest rate. First, the country is confronting mounting inflationary pressure. According to Statistics Korea, the consumer price index jumped 2.6 percent year-on-year in July. It has remained above the BOK's inflation target of 2 percent for four months in a row. The soaring prices were mainly due to higher prices of farm and oil products. But they are feared to rise further during the rest of the year.
Another reason is the surging household debt, which totaled 1,765 trillion won ($1.54 trillion) as of March 31, up 9.5 percent from the year before. We cannot overlook the seriousness of the debt load, which has already become a ticking bomb. It is urgent to take measures to prevent potential mass defaults which could lead to a collapse of the banking system in a worst-case scenario.
More worrisome are asset bubbles forming in the housing market. Home prices have continued to skyrocket since President Moon took office in May 2017. The government's expansionary fiscal policy and the BOK's monetary easing in the wake of the coronavirus outbreak in 2020 have added fuel to the fire. According to a KB Kookmin Bank survey, apartment prices jumped 9.97 percent nationwide and 12.97 percent in Seoul and the surrounding metropolitan area in the first half of the year.
In this situation, an interest rate hike is inevitable. Pre-emptive action is more than necessary to prevent the burst of asset bubbles, curb inflation, avoid a debt crisis and achieve financial stability. However, a rate increase will raise the debt repayment burden on households and businesses, especially financially-strapped small business owners. Thus, it is necessary to take comprehensive measures to ease their burden.
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