사진 확대 Kim Jung-beom, a reporter for the Ministry of Economy
In the center of the Bank of Korea building, the large letter “price stability” is engraved. The central bank’s basic responsibility is to lower interest rates to release money when the economy cools down, and to tighten the purse strings by raising interest rates when prices jump. The Bank of Korea’s Monetary Policy Committee will decide the benchmark interest rate on the 27th. The central bank, which raised its key interest rate to 2.75 percent last month, citing inflationary pressure, hinted at the possibility of a further hike this month.
In terms of prices alone, the BOK’s choice seems simple. If consumer and producer prices are high, and international oil prices and exchange rates are unstable, the central bank should consider raising interest rates. This is because price stability is the reason for the existence of the Bank of Korea. However, it is not easy to raise interest rates considering the increased household debt and the burden of vulnerable borrowers. It is a dilemma of the BOK’s monetary policy.
Household credit has exceeded 2,000 trillion won, and the proportion of vulnerable borrowers is also rising. According to the report, 13 out of 100 household loan borrowers spend more than 70% of their annual income paying off their debts. If interest rates on loans rise, vulnerable borrowers who spend a large portion of their income on repayment of principal and interest will inevitably be burdened.
In particular, self-employed low-income elderly people are the first weak link that can be shaken by interest rate shocks. While they have a weak income base, the average loan size is larger than that of the young and the elderly. There is also a high dependence on non-bank deposit handling institutions such as mutual finance and savings banks, which have relatively high interest rates.
A shock can lead to a rise in delinquency rates and insolvency in non-banking sectors, not just individual insolvency of borrowers. In addition, after removing the semiconductor boom, domestic demand is frozen, and small and medium-sized companies suffer from sluggish sales.
At the same time, in a situation where prices and international oil prices rise again and exchange rate instability continues, premature expectations of monetary policy easing could stimulate expected inflation. The Bank of Korea is also wary of the fact that it can re-stimulate rising mortgage loans and rising real estate prices.
In terms of prices alone, a rate hike may seem like a clear prescription, but it is an unaffordable burden for someone and can be a pressure to accelerate business closures. This is why the Bank of Korea’s concerns are deepening ahead of the interest rate decision.
[Kim Jung Beom, a reporter from the Ministry of Economy]