"Interest Rate Hike This Month... Expected to Limit Volatility from US Tapering"

Interview with Hwang Sunju, KDI Research Fellow
Need for Monitoring Insolvency Risks Focused on Vulnerable Borrowers
Prolonged Global Supply Chain Bottlenecks and Continued Raw Material Price Increases Drive Inflation Up
Limited Impact on Bond and Stock Markets
Real Estate Market May See Price Declines Due to Chain Effects of US Tapering

[Asia Economy Reporter Jang Sehee]"Since the Bank of Korea's Monetary Policy Committee has continuously conveyed the message that it will raise rates once more within this year, there is a high possibility that the interest rate will be increased at the upcoming MPC meeting scheduled for this month."

Hwang Soon-joo, a financial expert and research fellow at the Korea Development Institute (KDI), emphasized in a Zoom interview with Asia Economy on the 1st that "the quantity control on household loans currently implemented by financial authorities has an effect similar to tapering."

Research Fellow Hwang predicted that tapering itself will not accelerate the overall scenario of our interest rate hikes. This is because, in our case, household loan regulations are already considered to have an effect similar to tapering (asset purchase reduction). According to economic theory, quantity control regulates the total volume itself, preventing excess supply. It blocks additional liquidity supply. He forecasted, "It will be difficult to continuously raise interest rates through monetary policy while household loan regulations continue."

If interest rates are raised consecutively this year and early next year, the risk of defaults will expand mainly among vulnerable borrowers... Selective support such as policy funds is necessary

He emphasized that if interest rates are raised consecutively this year and next year, side effects could occur in various areas. Research Fellow Hwang said, "If interest rates rise rapidly, the risk of defaults will likely expand mainly among vulnerable borrowers," adding, "Not only households but also companies could see a deterioration in overall debt quality as delinquency rates and interest coverage ratios increase."

In fact, according to the 'Financial Stability Status' report released by the Bank of Korea on the 24th of last month, the interest burden due to the base rate hike is greater for high-income earners and vulnerable borrowers. If the base rate rises by 0.5 percentage points, interest for high-income earners (top 30% income bracket) increases from 3.81 million KRW to 4.24 million KRW, a rise of 0.43 million KRW. For vulnerable borrowers (multiple debtors with income in the bottom 30% or credit score below 664), interest rises from 3.2 million KRW to 3.73 million KRW, an increase of 0.53 million KRW.

Research Fellow Hwang added, "It seems desirable for financial authorities to provide selective support through policy funds and other means." The Bank of Korea has also mentioned that for some vulnerable sectors, the risk of defaults could increase due to the combination of interest rate hikes and the termination of various financial support measures.

Research Fellow Hwang advised that if the Fed implements tapering amid rising inflation, the economic cost could be significant. He said, "With inflation (persistent price increases) driven by supply-side factors continuing, implementing tapering could largely hinder economic recovery," adding, "The economic cost could increase further." He forecasted, "Considering ongoing supply chain bottlenecks and inflation, the scale or timing of tapering is unlikely to be significantly adjusted." He also projected, "Due to supply management centered on the Organization of the Petroleum Exporting Countries (OPEC) and geopolitical factors in the Middle East, global inflation is expected to continue for the time being."

Low possibility of a tightening tantrum like in 2013... Bond yield rise expected to be limited

He predicted that while short-term volatility in the market may increase, a tantrum (tightening tantrum) like in 2013 will not occur. This is because the Fed has actively communicated with the market, limiting negative impacts.

Research Fellow Hwang said, "Back in 2013, the market reaction was large because it was unexpected," emphasizing, "The tapering aspect has been somewhat pre-reflected in the market." He explained, "If the timing is brought forward or the scale of tapering is increased, bond yields might rise slightly, but if it proceeds as expected, bond yields will not fluctuate significantly." On the 29th of last month, the 3-year government bond yield in the Seoul bond market closed at 2.103%, up 0.086 percentage points from the previous day, marking the highest level of the year. This was influenced by the possibility of early tapering in the U.S. and the government's strengthened loan regulations.

He viewed that the real estate market would be affected depending on the timing and magnitude of the base rate hikes in South Korea. Since liquidity supplied to real estate is raised from domestic funds rather than foreign capital, there is no direct impact from tapering. However, if we accelerate tightening in a chain reaction, it could act as downward pressure and pull down housing prices. He emphasized, "As the U.S. embarks on full-scale tightening, if we adjust the timing or magnitude of hikes, it will likely act as downward pressure on real estate."

He predicted that the stock market would not fall significantly due to improvements in major companies' earnings and pre-reflection of liquidity reduction. In fact, domestic securities firms expect the KOSPI index to surpass its all-time high next year. Shinhan Investment Corp. forecasts a range of 2850?3500, KTB Securities and Kyobo Securities expect 2850?3450, Kiwoom Securities projects 2950?3450, and Samsung Securities anticipates 2800?3400. He said, "The stock market is somewhere between developed and emerging markets," and "It seems unlikely that foreign investors' funds will directly exit the stock market." He added, "On the contrary, if the sharply increased national debt and fiscal soundness deteriorate in the mid to long term, it could act as a factor of market instability."

Meanwhile, Research Fellow Hwang graduated from Handong University with a degree in economics and earned his master's and doctoral degrees in economics from Seoul National University and the University of Texas in the U.S. He has served as an adjunct professor at KDI and as a member of the Management Evaluation Committee for quasi-governmental agencies under the Ministry of Strategy and Finance.

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