Minimize the effect of a rate hikeThe ultra-low interest rate days near a end. In its monetary policy meeting on Thursday, the Bank of Korea (BOK) raised its base rate by 25 basis points to 0.75 percent. The benchmark rate hike was the first since May 2020 and the first hike among major economies in Asia since the outbreak of the pandemic last year.
The move is aimed at addressing a record stockpile of household debt, at 1,805 trillion won ($1.5 trillion), as of June, amid unprecedented government stimuli to fight Covid-19 and resolve a dangerous buildup in housing prices and inflation.
A a quarter of a percentage point hike may not be enough to contain inflationary pressure. Some in the market project one or two additional raises. BOK Governor Lee Ju-yeol suggested an additional raise by saying that the central bank took the first step to address the “accumulated financial imbalances.” He said he will gradually adjust the scope in the looseness in monetary policy to help stabilize the financial market.
But the side effects from monetary tightening should be minimized. Borrowers must not be pushed to their limits and those who are in need of loans to sustain their livelihood should be relieved. Commercial banks under order from the financial authority are suspending new loans and raising interest rates.
There are already panicking voices. Autumn is the usual moving season. Apartment prices have hit a record high and rent is soaring since the tenant law took effect. Some even wrote on the Blue House civilian petition page that they would have to steal to afford to pay rent. They are baffled by the loan cut and the interest rate increase on top of surging housing expenses from the government’s repeated failures in real estate policy.
An association of small merchants expressed worries about the deepening interest payment burden after the interest rate hike. It is the time for the government to present elaborate measures to reduce speculation and asset bubbles while not affecting the business activities of the mom-and-pop stores and self-employed adversely.
According to the BOK, a rise of 1 percentage point in the lending rate could add interest worth 11.8 trillion won. Of household debt at banks, 72.7 percent is lent on floating rates as of June. The rate increase could immediately affect the monthly dues of borrowers.
Consumers also must be aware of higher interest rates. Before the rates go higher, they should try to pay in advance if they can and refrain from debt-financed investments in stocks and digital coins.