Will the Era of 'Rational Overheating' End... Stock and Real Estate Markets Eyeing Central Banks

Central Bank's Slight Moves
May Trigger Rapid Capital Outflow

Rising Interest Rates Increase Burden on Debt-Ridden Households and Businesses
Reduced Consumption Negatively Impacts Real Economy

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The biggest concern when central banks intervene in monetary policy to combat inflation is the asset market. Stock and real estate markets have rapidly expanded since the COVID-19 pandemic, fueled by abundant liquidity. If central banks' 'subtle' moves to withdraw liquidity are detected, funds could quickly flow out. The bubble has already grown so large that it is difficult to explain with economic indicators, but investors have increased their stakes under the expectation that central banks will continue supplying liquidity. It was a case of 'rational overheating.'

If the asset market bubble bursts, the burden on companies and households that have endured the COVID-19 shock through debt, as well as individual investors who borrowed to invest in real estate or the stock market, could increase. If economic agents with increased debt burdens sharply reduce consumption, a domino collapse leading to a real economy shock could become a reality.

According to the Financial Services Commission and the Bank of Korea on the 17th, household loans across the entire financial sector, including commercial banks, increased by 10.1 trillion won compared to the previous month. Recently, loans have grown mainly in non-bank sectors such as mutual savings banks rather than in commercial banks. As commercial bank loans grew excessively last year and authorities tightened lending, loans shifted to the secondary financial sector. Household debt (1,940 trillion won) has already surpassed the size of the national economy (1,918 trillion won). As of the third quarter of last year, the household debt-to-nominal GDP ratio was 101.1%, up 7.4 percentage points from the same period the previous year.

Experts believe that if a sudden monetary tightening occurs while the significantly increased debt has flowed into the asset market, the shock will be substantial.

Similar movements are already being detected in the financial market. Government bond yields have recently rebounded, pushing up loan interest rates. According to the Bank of Korea, as of December last year, the loan interest rate at deposit banks (based on new loans) was 2.74%, up 0.03 percentage points from the previous month. This is the highest level in seven months since May last year (2.82%). It has been rising continuously since hitting a low of 2.63% in August last year. The interest rate on unsecured loans rose sharply by 0.49 percentage points to 3.5% compared to the previous month.

Kim Sung-taek, a research fellow at the International Finance Center, said, "Unlike past economic cycles where interest rates rose with inflation, this time the U.S. Federal Reserve (Fed) will use various measures to suppress nominal interest rate increases as much as possible," but added, "If nominal interest rate management fails, credit conditions will deteriorate, risky assets will be adjusted, and capital outflows from emerging markets may expand."

This content was produced with the assistance of AI translation services.