When the rates rise

This week, the Federal Reserve raised rates by a quarter percentage point to a range of 1.25 to 1.5 percent in its last monetary policy meeting of the year. The increase was the third this year following similar moves in March and June.

The U.S. central bank made clear it would continue to raise rates at least three more times next year, and expressed confidence in the solid improvement of employment figures, economic growth and financial markets.

The Korean market largely shrugged off the highly-anticipated rate increase on Wednesday. The won rose, and foreign investors purchased 300 billion won ($276 million) in Korean stocks. Investor sentiment focused on the upsides of the rate hike, including the Fed’s confidence in the American and global economy.

Bank of Korea Gov. Lee Ju-yeol, also predicted little impact on the market as they had already factored in the additional rate increase this month.

We may be safe for now, but Korea’s economic conditions are different from the United States. The data shows improvement, but employment is slack and household debt hovers above 1,400 trillion won ($1.29 trillion). Korea will not be able to raise interest rates as quickly as the United States because of the debt. At the same time, Korea could stoke a foreign capital flight if rates are higher than the Fed rates. In a recent report, the Bank of Korea indicated that a rate increase of 1 percentage point would not raise the debt burden of households and companies by very much.

But the problem is mortgage-related debt. About 80 percent of debt held by 6.1 percent of households is owed to multiple lenders. If they start to sell homes, mortgage values could plummet and shake the real estate market. Financial authorities must coordinate a balancing act between fiscal and monetary policy to navigate a soft landing.

JoongAng Ilbo, Dec. 15, Page 38