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No more discord in household debt control

Published: 22 Sep. 2024, 20:00

The U.S. Federal Reserve last week initiated the long-anticipated pivot to bring down the benchmark rate from 20-year highs but used a bolder opener with a half-point cut to imply its urgency toward its soft-landing goal amid fast cooling in the hiring market. The cut is the first in four years and is expected to be followed by another 50 basis points cut within the year. Other central banks in Europe and the United Kingdom already dialed down their base rates to suggest a global exit from the two-year battle with post-pandemic inflation and restrictive policy.

The Fed move not only has implications for the U.S. domestic demand — more investments and jobs — but also for the global capital flow. The lowering of the U.S. rate would narrow the gap with the Japanese yen and galvanize the unwinding of the carry trade leveraging Japanese debts when the rate was in the zero range to invest in U.S. tech equities and riskier assets in Mexico, Australia and others. The unwinding sparked by Japan’s rate increase in July had rocked the global market. Seoul must be extra vigilant against volatilities in the rate transition period.

Lowered rates in the United States help widen the maneuvering room for the Bank of Korea (BOK). The rate difference in the top end has come down to 1.5 percentage points from 2 percentage points, lifting the pertinent risk in the foreign exchange market. The BOK now can make its monetary decisions guided more by local factors. The central bank is expected to follow the cue from the United States. The domestic demand stifled by high interest rates in Korea can receive some relief when they come down.

But a bigger challenge is posed by the heat in the housing market in the capital region and the snowballing household debt. Apartment prices in August jumped to their highest in six years. Loan tightening has helped cool some of the heat, but if lending rates are lowered, it can renew the surge in household debts and housing prices.

Policymakers tend to overestimate their control over the market. They navigate under the ambitious goal of aiding the domestic market without upsetting the housing and financial markets. But all policies come with tradeoffs. The initiation of monetary easing must take place after carefully examining the priority order and all-around data.

Korea, a small open economy susceptible to external shocks, must build its guardrails as strong as possible. Fiscal robustness and hands-on macroeconomic management are the most reliable protection. The four chiefs of the Finance Ministry, the central bank, the Financial Services Commission and the Financial Supervisory Service must not raise different voices on household debt management. In volatile times, credibility in policymaking should not be compromised.