Hankyung Research Institute "If South Korea Follows US Interest Rate Hikes, Annual Interest per Household Increases by 3.4 Million KRW"

Annual Household Loan Interest Burden Increase of 40 Trillion Won Due to Interest Rate Hikes

[Asia Economy Reporter Park Sun-mi] On the 16th (local time), the United States raised its benchmark interest rate by 0.25 percentage points for the first time in 3 years and 3 months, signaling the start of a full-scale rate hike. If this leads to a series of rate hikes by the Bank of Korea, household interest burdens will increase significantly, and preparations are necessary, experts advise.

On the 17th, the Korea Economic Research Institute (KERI) released an analysis titled ‘The Impact of U.S. Interest Rate Hikes on the Korean Economy and Implications,’ estimating the appropriate short-term U.S. Treasury bond rate based on economic variables such as U.S. inflation rate, unemployment rate, and money supply. The result showed that the appropriate rate for the 6-month U.S. Treasury bond is 2.14%. Considering that the average bond rate in the fourth quarter of last year was 0.10%, this implies an increase of 2.04 percentage points going forward.

KERI estimated that if South Korea’s short-term government bond rate rises by the same 2.04 percentage points as the appropriate U.S. rate increase, household loan interest rates would increase by 2.26 percentage points, and the annual increase in household loan interest burden due to the rate hike would reach 39.7 trillion won. The interest burden per household with financial debt would increase by 3.4 million won.

Furthermore, considering expected exchange rate fluctuations and the interest rate differential between the U.S. and Korea (U.S. rate minus Korean rate), a model was established to explain the net inflow ratio of foreign investment funds relative to GDP, estimating the impact of the U.S. rate hike. The estimation showed that if the U.S. raises its benchmark rate causing the 6-month bond rate to rise by 2.04 percentage points compared to the fourth quarter of last year, and Korea does not raise its rates, the net outflow of foreign investment funds from the Korean market would amount to 3.15 billion U.S. dollars.

Choo Kwang-ho, Director of Economic Policy at KERI, stated, “This U.S. rate hike is expected to trigger a global tightening rally.” He added, “Since household debt and the ratio of marginal firms remain high, efforts should be made to enhance corporate competitiveness and expand private sector job creation to strengthen the private sector’s resilience against rate hikes, while also securing macroeconomic stability such as fiscal soundness.”

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