Soft-landing for household debt

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Soft-landing for household debt

Korean markets have been battered by the tantrums over fast monetary tightening. The Kospi dropped below 2,500 earlier this week for the first time since November 2020. The U.S. dollar briefly passed the 1,290-won ceiling on foreign capital flight from stock upsets in the U.S. and Europe.

The market fears a “giant step” of lifting the benchmark rates by 75 basis points during the U.S. Federal Reserve’s rate-setting meeting this week, surpassing earlier 50-basis-point increases expected in June and July upon confirming the U.S. inflation rate jumping 8.6 percent on year in May, the steepest gain in 41 years.

If the U.S. raises interest rates in a bigger scope to help tame inflation, monetary policies of Korea and other countries will be affected. Central banks of developed economies except for Japan have begun raising their rates or readying to do so. Bank of Korea Governor Rhee Chang-yong has forewarned that interest rates in Korea would continue to go higher. But rate increases to contain inflation can be less effective when price pressure has been largely led by a shortage of supplies due to the global bottleneck and disruptions from the Ukraine war. Too fast increases could only dampen consumption and corporate investment to slow the economy. The World Bank has warned of a “considerable danger” of stagflation.

The government bond yields have hit the highest level in 10 years. For instance, the three-year government bond yield has shot above 3.6 percent. Compared to the pandemic period when the base rate was at 0.5 percent, market yields in Korea have gained 3 percentage points. Individual lenders who have borrowed on floating rates will be burdened in debt financing. Leveraged investors who sought cheap loans to invest in assets could turn delinquent. If mortgage loan rate shots up to 7 percent, salaried households would have to carve out 70 percent of their monthly income to cover loan interest. The government urgently needs to come up with measures to navigate soft-landing in household debt that stretched during the low interest and pandemic period.

The Korean economy faces multiple whammies. Aside from financial volatility from tightening tantrums, the country is grappling with twin deficits in fiscal and trade accounts, a shipping crisis from cargo truckers, a global recession, and economic slowdown in China. Choo Kyung-ho, deputy prime minister for economic affairs, warned that a complex crisis has been triggered. The government must closely monitor and supervise risk factors so as not to build up to an economic crisis. It must contain inflationary pressure and stabilize livelihoods for the people. Radical deregulation must be accelerated to spur private-sector innovations and growth.
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