Increasing Concerns over Household Debts
The Bank of Korea kept the key rate at 0.5 percent on May 27. At the same time, the central bank adjusted its South Korean economic growth forecast for this year from 3 percent to 4 percent. The key rate is likely to be raised this year, meaning more burden on indebted households.
Bank of Korea Governor Lee Ju-yeol remarked that benchmark rate adjustment within this year hinges on COVID-19 situations and economic conditions in the end and the policy of the Fed is an important consideration and yet is not decisive, implying South Korea may raise the key rate ahead of the United States. The fact that the growth forecast was raised by 1 percentage point at a time, which has few precedents, means that a higher benchmark rate is imminent after a fall from 1.25 percent to 0.75 percent in March last year and another fall to 0.5 percent in May last year.
Under the circumstances, concerns over indebted households cannot but increase with their debts amounting to 1,765 trillion won. The central bank governor did not forget to sound an alarm, either. “Needless to say, a higher interest rate means more debt repayment burden, a continuous increase in household debts entails serious repercussions, and the repercussions can be addressed only with an even greater cost,” he said.
According to the central bank, a 1 percentage point rise in interest rate leads to a 12 trillion won and 5 trillion won increase in required repayment on the part of households and self-employed persons, respectively.