"This Year, Corporate Interest Expenses Increased by 13.5 Trillion Won Due to Base Rate and Inflation"

Corporate Loan Interest Rates Rise by 0.95 Percentage Points Due to Base Rate and Expected Inflation Increase
Bank Sector Interest Estimated to Increase by 10.4 Trillion KRW, Non-Bank Sector by 3.1 Trillion KRW

[Asia Economy Reporter Lee Hyeyoung] An analysis has revealed that due to this year's base interest rate hikes and inflation-driven loan interest rate increases, the interest expenses that companies must bear will rise by 13.5 trillion KRW. The net profit margin on sales is expected to decline by 0.29 percentage points, indicating a deterioration in profitability.

The Korea Economic Research Institute (KERI) announced this on the 14th through its analysis titled "The Impact and Implications of Base Interest Rate and Inflation on Corporate Interest Burden and Profitability."

KERI expects that alongside the base interest rate hikes, inflation driven by a sharp rise in international raw material prices will stimulate expected inflation, leading financial institutions to secure future interest margins, which will cause corporate loan interest rates to increase. The domestic base interest rate had been maintained at 0.5% since the second quarter of last year but was raised by 0.25 percentage points each in August and November this year, currently standing at around 1.0%.

KERI analyzed data from the first quarter of 2010 to the third quarter of 2021 to assess the impact of simultaneous increases in base interest rates and expected inflation on corporate loan interest rates, as well as the effect of corporate loan interest rates on companies' interest expenses and profitability.

The results showed that a 1 percentage point increase in the base interest rate and expected inflation rate corresponded to increases in corporate loan interest rates of 1.03 percentage points and 0.33 percentage points, respectively.

The impact of base interest rate hikes and rising expected inflation on corporate interest burden and profitability was also found to be significant. KERI estimated the changes in base interest rate and expected inflation rate to be 0.5 percentage points and 1.3 percentage points, respectively. The expected inflation change was calculated by subtracting the average consumer price inflation rate of 1.1% from 2015 to 2019 from KERI's forecasted consumer price inflation rate of 2.4% for this year.

Based on these changes in base interest rate and expected inflation, the estimated increase in corporate loan interest rates was 0.52 percentage points due to the 0.5 percentage point rise in the base interest rate and 0.43 percentage points due to the 1.3 percentage point rise in expected inflation, resulting in a total increase of 0.95 percentage points in corporate loan interest rates.

When corporate loan interest rates rise by 0.95% due to simultaneous increases in base interest rate and expected inflation, the annual interest burden on companies is analyzed to increase by a total of 13.5 trillion KRW. By financial sector, the interest burden on companies borrowing from banks is expected to increase by 10.4 trillion KRW annually, while non-bank financial institutions will see an increase of 3.1 trillion KRW.

With a 0.95 percentage point rise in corporate loan interest rates, the net profit margin on sales is projected to decrease by 0.3 percentage points annually. The impact on net profit margin by industry is 0.2 percentage points for manufacturing and 0.4 percentage points for non-manufacturing, indicating that non-manufacturing sectors are more affected by interest rate hikes.

By sector, the impact on net profit margin is highest in real estate (1.93 percentage points), followed by arts, sports, and leisure services (0.96 percentage points), other personal services (0.92 percentage points), and accommodation and food services (0.79 percentage points), showing that the effect of interest rate hikes is mainly concentrated in non-manufacturing service industries.

Choo Kwangho, Director of Economic Policy at KERI, stated, "Domestic companies are facing significant cost burdens due to recent surges in international raw material prices and logistics costs, and with rising interest rates increasing financing costs, they are struggling to maintain profitability. It is urgent to slow the pace of interest rate hikes and establish measures to stabilize international raw material prices."

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