BOK report suggests interest rate hike could be imminent

The Bank of Korea stressed the need to further raise the country's key interest rate to resolve worsening financial imbalances in its financial stability report published Friday.

Bank of Korea's headquarters in central Seoul [YONHAP]

The Bank of Korea stressed the need to further raise the country's key interest rate to resolve worsening financial imbalances in its financial stability report published Friday.

The central bank had already raised the base rate by 25 basis points to 0.75 percent in August.

The report assessed that a rate hike will do more good than harm by curbing the growth of household debt and lowering expectations on an additional increase in asset prices.

"Considering the macroeconomic situation in Korea, a rate hike would contribute to maintaining financial stability of households, companies and financial institutions and in the longer term resolving financial imbalances," the report wrote.

The central bank report did acknowledge that a rate hike will increase the burden on indebted households and companies, but noted that economic parties currently have the capacity to withstand a rate hike.

For those groups that were heavily hit by the coronavirus pandemic and are financially vulnerable, the central bank said a fiscal policy dedicated to a selective group of people would be necessary.

The bank maintained its stance that raising interest rates by another 25 basis points is still accommodative.

The central bank said the household interest burden would increase by 2.9 trillion won ($2.5 billion) compared to the end of 2020 on 25 basis points of rate hike this year, and 5.8 trillion won on 50 basis points of rate hike.

"Even if the country's base rate is raised by 50 basis points [this year], households will have to pay roughly 59 trillion won in interest, which is still lower than the 60.4 trillion won interest burden in 2018 when loan rates were relatively high," the report said.

In 2018, the country's key interest rate was at 1.5 percent, until it was raised to 1.75 percent at the end of November and maintained that rate through the end of the year.

The BOK has been signaling that an additional rate hike is likely as household debt keeps rising, burdening the financial stability of the Korean economy.

According to the Friday report, Korea's household debt to gross domestic product (GDP) ratio at the end of the first quarter of this year was 104.9 percent, which is the fifth highest among the top 30 countries in the world based on nominal GDP. The number is also marginally higher than the average household debt to GDP ratio of the 30 countries, at 63.2 percent.

Soaring house prices and young Koreans' growing tendency to borrow to invest drove the rapid growth in household debt this year.

According to the central bank, debt growth of Koreans in their 20s and 30s was much faster than other age groups.

In the second quarter of this year, debt held by people in their 20s and 30s grew by 12.8 percent on-year, which is much faster than the 7.8 percent by other age groups.

"As stock prices have been rising since 2020 and there have been a number of initial public offerings from big companies, there is a possibility young Koreans used part of their unsecured loans in the stock investment," the report said. "Based on data from five major brokerage houses in Korea, among 7.23 million brokerage accounts newly opened in 2020, 54 percent were held by people in their 20s and 30s."

The monetary policy board of the Bank of Korea decides to raise the country's benchmark interest rate by 25 basis points to 0.75 percent in August. [BANK OF KOREA]

The central bank has two remaining monetary policy board meetings this year, in October and in November.

When questioned about the timing of any additional tightening, BOK Gov. Lee Ju-yeol said after the August monetary policy board meeting that the board "shouldn't rush, but at the same time, shouldn't be late."

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]