"Household Burden Soars Due to Interest Rate Hikes and Price Instability... Interest per Household Up 1.5 Million Won This Year"

Analysis by Hankyung Research Institute... Household Loan Interest Rates Expected to Rise by 1.03% This Year

[Asia Economy Reporter Jeong Hyunjin] As the Bank of Korea raised the base interest rate on the 25th, reopening the '1% interest rate era,' it is forecasted that household loan interest rates will increase by 1.03 percentage points due to this year's base rate hikes and inflationary pressures. Consequently, the annual interest burden and delinquent amounts for households are expected to rise by 17.5 trillion KRW and 3.2 trillion KRW respectively, with the interest burden per household reaching 1.5 million KRW, significantly increasing the financial strain on households.

The Korea Economic Research Institute under the Federation of Korean Industries announced this in its analysis titled 'The Impact and Implications of Base Rate Hikes and Inflationary Pressures on Household Loans.' Using quarterly data from Q1 2008 to Q2 2023, the study analyzed the effects of base rate hikes and expected inflation on household loan interest rates, as well as the impact of household loan interest rates on delinquency rates.

The analysis found that a 1 percentage point increase in the base interest rate and expected inflation rate results in household loan interest rates rising by 1.13 percentage points and 0.35 percentage points respectively. Regarding household loan delinquency rates, a 1 percentage point increase in the base rate raises delinquency by 0.2 percentage points, while a 1 percentage point increase in expected inflation raises it by 0.06 percentage points.

The Korea Economic Research Institute stated, "The base rate hike acts as a factor driving up household loan interest rates," adding, "The recent surge in international raw material prices leading to consumer price increases and rising expected inflation will also contribute to the rise in household loan interest rates."

Based on these analysis results, the institute estimated the impact of recent base rate hikes and sharp consumer price increases on expected inflation on household loan interest burdens and delinquency amounts. As a result, with two 0.25 percentage point increases in the base rate in August and this month, totaling a 0.5 percentage point rise, household loan interest rates increased by 0.57 percentage points. Additionally, a 1.3 percentage point rise in expected inflation caused household loan interest rates to increase by 0.46 percentage points. Combined, changes in the base rate and expected inflation resulted in a total 1.03 percentage point increase in household loan interest rates.

When household loan interest rates rise by 1.03 percentage points due to simultaneous increases in the base rate and expected inflation, the annual household interest burden is analyzed to increase by 17.5 trillion KRW. Converting this to the amount per household with financial debt (11.74 million households, Statistics Korea, 2020), the additional interest burden per household is calculated at 1,491,000 KRW annually. The increase in household loan delinquency amounts due to the interest burden is estimated at 3.2 trillion KRW.

Looking in detail, a 0.5 percentage point rise in the base rate results in an annual interest burden increase of 9.6 trillion KRW and a delinquency increase of 1.7 trillion KRW, while a 1.3 percentage point rise in expected inflation causes an interest burden increase of 7.9 trillion KRW and a delinquency increase of 1.4 trillion KRW.

The Korea Economic Research Institute pointed out that although the base rate hike is inevitable considering the recent sharp increase in household debt and inflation driven by international raw material prices, given that strong household loan regulations such as total loan volume caps and Debt Service Ratio (DSR) regulations are already in place, further interest rate hikes could significantly expand household financial burdens.

Choo Kwang-ho, Policy Director at the Korea Economic Research Institute, stated, "Low-income groups are vulnerable to interest rate hikes, so consecutive base rate increases over a short period are likely to cause side effects such as rising delinquency rates," emphasizing, "It is necessary to moderate the pace of interest rate hikes and urgently increase household income through the creation of quality private-sector jobs."

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