Hong Nam-ki "If interest rates rise, household and corporate burdens increase... Need for careful consideration" (Comprehensive)

Hong Nam-ki "Interest rates are independently decided by the Bank of Korea... Limits to government interference in monetary policy"
Lee Ju-yeol, Governor of the Bank of Korea, attends G20 meeting... "There is an opportunity for consultation"

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance (left), and Lee Ju-yeol, Governor of the Bank of Korea [Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] As the Bank of Korea officially announced a 'rate hike within the year,' Deputy Prime Minister and Minister of Strategy and Finance Hong Nam-ki stated on the 25th, "If interest rates rise, the interest burden on households and businesses is expected to increase."

Deputy Prime Minister Hong appeared at the National Assembly's Planning and Finance Committee plenary session that morning and responded to Democratic Party lawmaker Jeong Il-young's question, "Isn't the Bank of Korea's rate hike conflicting with economic stimulus through disaster relief funds?" by saying, "Since monetary authorities independently discuss interest rates, it is not appropriate for the government to comment," thus beginning his remarks.

However, he added, "It is desirable for fiscal and monetary policies to be harmoniously implemented in managing the economy," and said, "Various considerations are necessary." If the Bank of Korea raises rates within the year, the interest burden on already increased household debt will grow. Hong said, "It is necessary to observe the situation (debt burden) of households, businesses, and the government," and added, "The government will strive to harmonize various fiscal and financial policies."

Hong also stated, "There are limits to government interference in monetary policy that determines interest rates. Not just limits, but the Bank of Korea operates independently," and said, "We fully respect the Bank of Korea's independence, and since Governor Lee Ju-yeol and I are scheduled to attend the G20 meeting together early next month, there will be an opportunity to consult around that time."

Meanwhile, Governor Lee officially announced a rate hike within the year by mentioning the possibility of inflation at the '2021 First Half Inflation Targeting Review Briefing' held the previous day. Earlier, the Bank of Korea hinted at a possible rate hike in the second half of the year, citing rapid asset price increases and soaring debt following over a year of monetary easing since COVID-19. Since inflation has risen more than expected and is judged to fluctuate around the 2% inflation target, a rate hike within the year by the Bank of Korea is widely anticipated.

Governor Lee said, "From a medium-term perspective, there are considerable latent factors that could cause inflation," and added, "Fiscal stimulus measures and large-scale liquidity supply implemented by governments and central banks worldwide, combined with rapid economic recovery, may further increase inflationary pressures." He also assessed, "As our economy's recovery becomes clearer, inflationary pressures from the demand side are gradually expanding."

He also clearly indicated the need to raise rates within the year, considering financial imbalances and inflation. He stated, "Normalizing interest rates in line with economic recovery is a natural process," and warned, "Neglecting to address financial imbalances will inevitably have very significant negative effects on the economy and inflation in the medium term."

As of the first quarter, domestic household debt stands at 1,765 trillion won, the largest ever. Since COVID-19, a strong preference for risky assets and low interest rates have made borrowing easier, leading economic agents to rush into asset investment with debt. The household debt-to-disposable income ratio was also high at 171.5% in the first quarter.

The Bank of Korea is concerned that if the ultra-low interest rate policy of around 0.50% per annum continues, the debt scale will grow uncontrollably, and if asset prices crash in the future, it could shake the financial system. Preparing for a rate hike is for these reasons.

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