‘Normalizing’ is bound to hurt

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‘Normalizing’ is bound to hurt

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The concerns about growing debt in Korea have sharply risen after the U.S. central bank started raising interest rates last month.

How bad will it hurt if Korea’s own central bank starts normalizing its own loose monetary policy?

A study by the Bank of Korea submitted to lawmaker Park Won-suk of the liberal Justice Party showed that if the Korean central bank raises the key interest rate by 0.25 percentage points, the cumulative cost of servicing the national household debt will rise an additional 1.9 trillion won ($1.58 billion).

When the interest rate increases by half a percentage point, that burden grows a further 3.9 trillion won and up to 7.7 trillion won when it is raised 1 percentage point.

Among five different income groups, the top 20 percent by income are expected to shoulder the biggest amount in interest payments on loans when the interest rate is raised.

The study showed that when the interest rate is raised 0.25 percentage points, the annual interest that the top 20 percent will have to pay amounts to 900 billion won. The burden on the bottom 20 percent will be 100 billion won.

The government has said it’s not too worried about the impact that interest rate hikes might have on financial markets since most of the loans have been borrowed by people who can afford the hikes because they have relatively higher incomes.

In fact, Finance Minister nominee Yoo Il-ho in answers delivered to lawmakers before a National Assembly hearing on his nomination said since the top 40 percent by income holds 70 percent of the nation’s household loans, and since financial assets are more than two times larger than financial debts, households’ abilities to repay debt are in a relatively good shape.

But Bank of Korea Governor Lee Ju-yeol is more cautious on the issue. On Tuesday he stressed the strong need to come up with plans that could “soft land” the household debt problem.

“Household debt has grown a lot and it could act as an obstacle that could limit the nation’s growth,” the central bank governor said.

Many think tanks are already projecting that the Korean central bank will likely start normalizing interest rates in the second half of this year or as early as in the second quarter since the U.S. Fed is expected to raise its interest rates three or four times throughout the year to 1.25 percent. If it does, the Korean central bank will likely be faced with pressure to raise interest rates in order to prevent an exodus of foreign investors.

As of the third quarter of 2015, Korean household debt along with purchases made via credit cards and loans amounted to an all-time record of 1,166 trillion won.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]

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