A stampede to spending

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A stampede to spending

Interest rates have been rising fast in the new year. The three-year government bond yield has hit 2.127 percent on Tuesday, the highest in three years and seven months. The rising market yields help push up financing costs for commercial banks, burdening households leveraged with 1,900 trillion won ($1.6 trillion) in debt.

Mortgage lending rates at banks have topped 5 percent and interest rates for rent loans also near 5 percent. Loan rates for jeonse, or deposits for long-term lease, have gone higher than monthly rent costs in some parts of Seoul. Paying landlords monthly fees may be cheaper than paying interests to banks for loans for long-term lease for some. When monthly rents become more common, the burden for tenants will increase.

Market rates are going up as central banks of Korea and the U.S. are rolling back liquidity they have unleashed to fight Covid-19 setbacks. The Bank of Korea has implemented back-to-back hikes on the projection of lengthier strengthening in inflation. The U.S. Federal Reserve is winding down tapering, or bond purchase program, faster and may start lifting its benchmark rates from March.

International oil prices have been rising fast on supply concerns from escalated geopolitical risks in the Middle East. Oil prices have jumped more than 10 percent in January. The news bodes badly for Korea which entirely relies on imports for petroleum. When fuel prices shoot up, production costs go up, hurting investment and production. Higher import prices aggravate inflation. Monetary authorities may have to fasten tightening.

Political populism has fanned interest rate increases. The government is readying a 14-trillion-won supplementary budget, which will be the first budgetary increase in January since 1951 during the Korean War. Yet the ruling Democratic Party (DP) wants a bigger increase. Even the conservative opposition People Power Party (PPP) is joining the chorus ahead of the presidential election on March 9.

Presidential candidates of the ruling and opposition parties are entirely engrossed with expansionary budget policies and tax cuts. Presidential candidates are promising one costly pork-barrel project after another without any care for the financing means.

The government already spent 130 trillion won in supplementary budget over the past two years amid the Covid-19 pandemic. The three-year government bond yield rose 1 percentage point during the period. Interest rates are not rising because the economy is doing well. It’s because the government increases its debt financing. Populist spending to win votes is toughening the lives of ordinary citizens, tenants and borrowers.
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