Former KFTC Member Shin In-seok: "Difficult to Curb Household Debt Increase Due to Interest Rate Hikes"

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[Asia Economy Reporter Jang Sehee] Shin Inseok, former member of the Financial Monetary Policy Committee of the Bank of Korea, expressed a negative stance on raising the base interest rate to address household debt issues. He argued that instead of responding immediately with monetary policy, the structural problems of the rapidly increasing household loans should be examined first.

On the afternoon of the 12th, Professor Shin, a former BOK monetary policy committee member and classified as a dove (preferring monetary easing), presented his reasons for opposing the base interest rate hike at a seminar held by the Korean Economic Association at the Bankers' Hall in Jung-gu, Seoul, titled "Recent Macroeconomic Situation Assessment and Monetary Policy Issues." The Bank of Korea raised the base interest rate by 0.25 percentage points to 0.75% per annum in August and has signaled an additional rate hike this month.

Professor Shin said, "The general interpretation of the recent change in monetary policy stance seems to be that the monetary authorities have set household debt stabilization, i.e., financial stability, as an urgent policy task," adding, "There is also a view that housing price stabilization acted as a secondary goal."

He emphasized that analyzing the causes of the rapid increase in household debt should take priority.

He diagnosed, "If the household debt level is excessive and requires adjustment, an accurate diagnosis of the causes is urgent. Jeonse loan (key money loan) was an important cause, and underlying that appears to be the expansion of public guarantee supply." According to Professor Shin, the guarantee amount for Jeonse loans by the Korea Housing & Urban Guarantee Corporation increased from 47.5 trillion won in 2017 to 119.9 trillion won as of June this year.

Professor Shin also expressed a negative view on the stance of raising the base interest rate when the private debt gap relative to Gross Domestic Product (GDP) turns positive. He emphasized, "The main reason the GDP gap is estimated to move toward zero or positive in the second half of next year is that the potential growth rate has declined," adding, "This raises the question of how to interpret this from the perspective of monetary policy."

He added, "Interpretations from the GDP gap perspective and the resulting monetary policy response direction carry a high risk of error."

He also cited that South Korea is responding preemptively compared to major advanced countries as a basis.

He stated, "As of August this year, the choice of South Korea's monetary policy authorities to clearly adopt a policy rate hike stance is far from the policy attitudes of major countries' central banks," adding, "Despite the recent significant rise in inflation rates due to soaring energy prices and growing concerns about the return of inflation risks in major countries worldwide, central banks in major countries are showing cautious attitudes toward raising base interest rates."

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