Rate rise would slow growth as debt weighs on economy

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Rate rise would slow growth as debt weighs on economy

A 1 percentage-point rise in the interest rate would drag down the South Korean economy by 0.2 percentage points due to a decline in corporate investment and private consumption, the central bank said Monday.

“If the base rate increases 1 percentage point, the growth rate of the gross domestic product (GDP) is projected to go down by 0.2 percentage points,” the Bank of Korea (BOK) said in a parliamentary report.

The central bank is subject to the annual parliamentary audit Monday.

Higher borrowing costs may force businesses to reduce their bank loans and investments, while individuals may cut down on spending.

As a result, consumer prices will also contract by 0.12 percentage points, according to the BOK report.

The surplus in the current account, on the other hand, is expected to expand by $1.88 billion.

“The analysis is based on past experiences,” the BOK said. “The effect of a rate hike may be changed by domestic and world economic conditions and economic players’ sentiment at a certain period of time.” Also, the central bank noted that South Korean households and businesses for the most part can cope with the increased debt-servicing burden even if a 1 percentage-point rate hike takes place.

“But those who have far more massive debts than their income or some financially vulnerable families, mid-sized and small firms and small mom and pops could be burdened more heavily,” the BOK said.

South Korea’s household credit reached a record high of nearly 1,500 trillion won ($1.33 trillion) as of the end of June.

Although the growth of household debt has slowed to some extent, the BOK believes it is still very high.

BOK Gov. Lee Ju-yeol has consistently emphasized the BOK’s role in addressing imbalances in the financial field brought on by nearly a decade of low interest rates that have inflated real estate prices and contributed to high household debt.

Last week, the BOK held the key rate unchanged at 1.5 percent but gave some strong signals to the market.

“We will focus more on financial stability issues than before if favorable macroeconomic conditions are set,” the BOK said in a statement, from which the word “carefully” was removed for the first time in a year.

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