Stop the spending splurge

The Bank of Korea raised the policy rate for the fourth time since August. The monetary policy board on Thursday bumped up the benchmark rate from 1.25 percent to 1.5 percent in a unanimous decision by six members, excluding the governor-chair as the nominee to the seat must go through a confirmation hearing to start the office.

The central bank projected on-year consumer price gains to remain above 4 percent for some time, while the economic growth this year will fall below the 3 percent estimated in February. Data suggests a stagflation. Rate increases can contain a further rise in consumer prices, but can have a negative effect on growth. Still, the central bank found containing inflation and household debt more urgent for the time being.

The U.S. Federal Reserve has been signalling faster tightening. It started lifting the Fed funds rate from the zero territory last month through a 25-basis point increase, and it is expected to make another increase in May. Some analysts even forecast a 50-basis point increase to tame inflation running at the fastest rate in 40 years. The tapering of ultra-loose liquidity during the pandemic has motivated foreign capital to roll back ownership of securities in riskier markets and caused a tantrum in emerging markets.

The interest costs will increase for the private-sector debt whose load is overwhelming the GDP. Households who have made leveraged investments in stocks and real estate will be alarmed. Household debt reached a whopping 1,862 trillion won ($1.5 trillion) at the end of December. When counting borrowings by the self-employed and nonprofit organizations, individual debt exceeds 2,200 trillion won, larger than the country’s GDP. When the interest rate goes up higher, so will the adverse impact on the economy. Authorities must navigate well for a soft-landing in the private-sector debt so that weak groups do not fall into the vicious debt cycle.

A policy mismatch — expansionary fiscal policy coupled with monetary tightening — could add to uncertainties for the new government. The legislature passed a supplementary budget of 17 trillion won ahead of the March 9 presidential election. The incoming administration plans to draw up a second supplementary budget this year. If the conservative government issues greater debt to finance supplementary budgets, it might accelerate the rises in borrowing costs for households and companies. Politicians must not forget that populist policies chasing immediate votes will only aggravate the lives of the working-class and vulnerable households.