[Base Rate 3%] Yoon Economic Team Taking Over 'Big Step' Struggles to Find Breakthrough Amid 3 Highs

Big Step Raises Interest by 330,000 KRW Per Person
Direct Hit to 2030 Young Borrowers and Self-Employed... Even Large Corporations Struggle to Pay Interest
External Variables Pressure Limits Policy Options... Experts Say "Ease Inflation First"

The Monetary Policy Committee of the Bank of Korea held a meeting on the 12th to decide on the direction of monetary policy and decided on a 'big step' increase, raising the base interest rate by 0.50 percentage points at once from the current 2.50%. On this day, a notice of today's interest rate was posted on the exterior wall of a commercial bank in downtown Seoul. Photo by Moon Honam munonam@

[Asia Economy Sejong=Reporters Kwon Haeyoung and Moon Jewon] #Mr. A borrowed about 460 million KRW from a bank two years ago to purchase a 30-pyeong apartment in Jung-gu, Seoul. The mortgage loan interest rate applied during the initial six months was 2.91% per annum, but as of this month, two years later, it has jumped to 5.07%. Mr. A's monthly principal and interest repayment on the mortgage loan also increased by more than 500,000 KRW, from 1.94 million KRW to 2.49 million KRW. Assuming that Mr. A's loan interest rate rises by an additional 0.5 percentage points a few months after the Bank of Korea's base rate hike on the 12th, his monthly principal and interest repayment would be about 2.65 million KRW. Mr. A said, "Since I am repaying the loan with equal principal and interest installments, the interest burden feels heavier," adding, "I am considering refinancing the loan even if I have to pay a prepayment penalty."

As the Bank of Korea takes the expected 'big step' (a 0.5 percentage point hike in the base rate at once), the South Korean government is facing a complex economic crisis due to external variables, deepening its concerns. While raising interest rates is an inevitable measure to curb soaring inflation and exchange rates, the interest burden on households and businesses is ballooning, and the economy, which is already expected to slow down next year, may cool even faster. In this dilemma of not being able to miss either price, interest rate, and exchange rate stability or growth, the economic team of the Yoon Seok-yeol administration, which must simultaneously step on the 'brake' and 'accelerator,' is also being put to the test.

According to the Bank of Korea on the 12th, with the Monetary Policy Committee raising the base rate by 0.50 percentage points that day, the average annual interest burden per borrower is analyzed to increase by 327,000 KRW to 3,821,000 KRW. Since the base rate has been raised eight times by a total of 2.5 percentage points from August last year to this day, compared to a year ago, the interest cost per person has increased by a whopping 1,635,000 KRW. The interest burden per household is even greater. When the interest rate rises by 0.50 percentage points, it increases by as much as 502,000 KRW, which is effectively at the level of an 'interest bomb.'

The problem is that low- and middle-income groups vulnerable to high interest rates, the '2030 Young-chul' youth who have borrowed heavily, and self-employed individuals with multiple debts are likely to be hit hardest. The upper limit of mortgage loan interest rates at commercial banks has already exceeded 7% and is on the verge of breaking 8%. Businesses are no exception. Not only small and medium-sized enterprises but even large corporations are struggling to pay interest. The Federation of Korean Industries reported that 3 to 4 out of 10 large companies currently cannot cover interest expenses with operating profits. This is why concerns are emerging about simultaneous insolvency of households and businesses.

Amid spreading fears of an economic recession next year, the rapid interest rate hikes could further worsen the economic situation. The International Monetary Fund (IMF) on the 11th (local time) projected the global economic growth rate for next year at 2.7% and South Korea's growth rate at 2.0%. These figures are 0.2 and 0.1 percentage points lower, respectively, than the previous forecast released in July. The Bank of Korea's liquidity tightening could completely extinguish the faint embers of the cooling economy. Earlier, the United Nations urged central banks worldwide, including the United States, to refrain from tightening, recognizing this situation.

The problem is that despite risks such as the interest bomb and economic recession, it is difficult to avoid raising interest rates to stabilize prices and exchange rates. The high inflation rate in the 5-6% range is becoming entrenched, and the interest rate gap between Korea and the U.S. due to U.S. rate hikes is pushing the exchange rate higher. For the economic team, raising rates increases the risk of household and corporate insolvency and the possibility of recession, while lowering rates causes inflation and exchange rates to soar, putting them in a difficult situation with no easy options. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho previously lamented the difficult situation, saying, "The complex crisis of high inflation, slowing economy, and financial market volatility will continue."

Experts point out that due to external variables such as the Ukraine war, U.S. interest rate hikes, and economic slowdowns in China and Europe, inflation and exchange rates are soaring and recession concerns are growing, leaving almost no policy options. However, they advise prioritizing inflation mitigation because failure to control inflation would shrink consumption and negatively impact the economy.

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "Due to the sharp U.S. interest rate hikes, the depreciation of our currency is severe, and internally, inflation is soaring," adding, "The economic team has no choice but to prioritize interest rate hikes and coordinate policies to find the optimal policy mix." Joo Won, head of economic research at Hyundai Research Institute, said, "If urgent situations such as a recession occur next year, the government seems to have no sharp measures other than preparing a supplementary budget (Chugyeong)."

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