Financial Authorities Expect Base Rate Hike to Ease Household Debt Pressure

"0.25%P Increase Likely to Have Limited Effect"
"Concerns Over Impact on Small Business Owners and SMEs More Than Households"

[Asia Economy Reporter Kwangho Lee] Financial authorities expect that the rapid increase in household debt will ease following the Bank of Korea's decision to raise the base interest rate from the current 0.5% to 0.75% per annum. When the base interest rate rises, loan interest rates increase, leading to a higher interest burden on households, which suppresses additional loan demand.

A financial authority official stated on the 26th, "The interest rate hike makes it easier to manage household debt, which has become a potential risk to our economy," adding, "However, the effect will be limited with only a 0.25 percentage point increase."

Financial authorities expressed concerns that the impact of the interest rate hike will be greater on small business owners and SMEs than on households.

The official explained, "Small business owners, who have been struggling due to the prolonged COVID-19 pandemic, may face increased interest burdens and be pushed to the brink of closure," emphasizing, "The role of financial programs that alleviate interest burdens for small business owners is important."

According to the Bank of Korea, as of the end of March, the outstanding loans to self-employed individuals in the financial sector amounted to KRW 831.8 trillion, and the proportion of borrowers who have both household and business loans is 84%. As of the end of March, there were 2.456 million self-employed borrowers in the financial sector, with an average loan amount of KRW 338.68 million per person.

For these reasons, there is growing weight to the possibility that the extension of maturity and repayment deferral for small business loans, scheduled to end next month, will be extended again.

However, financial authorities drew a clear line regarding the possibility of adjusting the pace of household debt management following the base interest rate hike. A financial authority official firmly stated, "Regardless of interest rate decisions, we will continue efforts to manage debt."

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