"Year-End and Next Year Base Interest Rate Expected to Rise... Emergency for Yeongkkeul and Debt Investment Groups (Comprehensive)"

Hana Financial Research Institute 'Economic and Financial Outlook' Report
Possibility of Additional Hikes Amid Real Estate and Household Debt Concerns

[Asia Economy Reporter Kiho Sung] Office worker Kim Seonghyun (alias) took out a 100 million KRW unsecured loan at a 3% variable interest rate from Bank A in January this year and has been repaying the debt over 120 months. Kim has been repaying 960,000 KRW monthly, covering both principal and interest. However, as the unsecured loan interest rate rose to 4%, the interest increased by about 80,000 KRW. With continuous news of further rate hikes, Kim’s worries are growing even more.

There is a forecast that the Bank of Korea’s base interest rate will rise to 1.25%, the level before the COVID-19 crisis, next year. Although one rate hike is expected after the new government is formed following the presidential election, additional hikes cannot be ruled out if the real estate market and household debt surge remain unstable.

Concerns are emerging that borrowers who took out loans at historically low interest rates amid last year’s “Yeongkkeul” (borrowing to the limit) and “Debt Investment” booms, as well as low-income and vulnerable borrowers, will face increased interest burdens. Especially since financial authorities have announced that loan regulations will continue until next year, making it difficult to roll over debt, the combined effect of rising interest rates could cause household interest burdens to snowball, highlighting the urgency of countermeasures.

According to the “2022 Economic and Financial Market Outlook” report released on the 7th by Hana Financial Management Research Institute, the base interest rate is expected to be raised additionally in the fourth quarter of this year and the third quarter of next year, considering economic recovery and the accumulation of financial imbalances. Regarding the timing of the hike in the third quarter of next year, the report took into account the need to review the new government’s policies, the appointment of a new Bank of Korea governor, and the expiration of some Financial Monetary Policy Committee members’ terms. Accordingly, it is expected to return to the pre-COVID-19 crisis level of 1.25% next year.

Furthermore, as the U.S. Federal Reserve (Fed) normalizes its monetary policy, market interest rates are also expected to continue rising. The 3-year government bond yield is predicted to increase from 1.65% in the fourth quarter of this year to 1.80% in the fourth quarter of next year.

However, the report conditions the single rate hike next year on the easing of financial imbalances due to two rate hikes this year and strengthened household debt regulations. If housing prices and household debt continue to surge until next year, two rate hikes cannot be ruled out. Kim Sujeong, senior researcher at Hana Financial Management Research Institute, emphasized, “The domestic policy authorities’ determination to ease financial imbalances and concerns over early tightening by the Fed due to prolonged inflation could lead to a steep rise in interest rates, which should be kept in mind.”

With a sharp interest rate hike expected next year, unsecured loan borrowers vulnerable to interest rate fluctuations, who took loans for “Yeongkkeul” and “Debt Investment,” are anticipated to be directly hit. According to the “Analysis of Household Debt Interest Repayment Burden Due to Interest Rate Hikes” recently released by the National Assembly Budget Office, as of July, 73.5% of household loans were variable-rate loans. Due to low interest rates and other factors, banks have preferred variable rates, increasing the share of variable-rate loans in household loans from 65.6% in March last year to 73.5% this year. In other words, when interest rates rise, the household interest repayment burden also increases.

The Budget Office analyzed that if household loan interest rates rise by 1 percentage point, the interest burden on Korean households will increase by 12.5 trillion KRW. Breaking this down by household characteristics, the interest repayment burden for households in their 40s is expected to increase by 4.02 trillion KRW. For those in their 50s, it is 3.96 trillion KRW, and for those aged 60 and above, 2.7 trillion KRW. By household head’s occupational status, salaried workers will bear an additional 6.29 trillion KRW, and self-employed individuals 4.57 trillion KRW.

The Budget Office stated, “If the Bank of Korea raises the base interest rate further, causing loan interest rates to rise, the increase in household interest repayment burdens may raise credit risks and negatively impact consumption. It is necessary to prepare responses and conduct close monitoring to address the increased credit risk and consumption contraction among vulnerable groups and the self-employed due to interest rate hikes.”

Meanwhile, Hana Financial Management Research Institute expects the economy next year to continue a favorable growth trend due to improved COVID-19 conditions and expanded domestic demand recovery. However, following this year’s V-shaped rebound, the base effect fading, reduced policy support, and export slowdown are expected to gradually weaken economic growth momentum, forecasting a growth rate of 2.8%, lower than this year’s estimated 3.9%.

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