The Bank of Korea is set to raise its base rate at the Monetary Policy Board meeting on July 16, yet three out of four new household borrowers have chosen floating-rate products. This runs directly counter to the standard advice that fixed-rate loans are more advantageous during a rate-hiking cycle.<\/p>\n
According to the Bank of Korea’s Economic Statistics System on July 13, the share of floating-rate loans in new household borrowing surged to 75.4% as of the end of May. Fixed-rate loans accounted for a mere 24.6%. The floating-rate share overtook fixed rates in December last year, rising from 45.4% in November to 51.1%, then climbed to 64.5% in March before breaching 75% in May.<\/p>\n
The reason borrowers are flocking to floating rates despite the risk of rising interest costs is the immediate rate differential. As recently as March this year, newly issued mortgage rates at commercial banks stood at 4.32% per annum for fixed-rate loans and 4.39% for floating-rate loans, making floating rates slightly more expensive. However, the situation reversed starting in April. By May, fixed rates had risen to 4.44% per annum, while floating rates fell to 4.23%, widening the gap to 0.21 percentage points. Borrowers, mindful of loan limits and immediate monthly repayment burdens, have effectively been chasing the lower rate.<\/p>\n
Banks are advising borrowers who choose the currently cheaper floating rate to consider refinancing later\u2014calculating early repayment fees against the interest rate differential\u2014if their loan rates spike significantly following base rate hikes.<\/p>\n
The Bank of Korea is expected to embark on a full-fledged monetary tightening cycle beginning this July. A survey conducted by the Seoul Economic Daily of 20 domestic economics and business professors and financial sector experts found that all respondents anticipate a 0.25 percentage point rate hike at the July 16 Monetary Policy Board meeting, lifting the base rate from 2.50% to 2.75% per annum. This would be the first rate increase in approximately three years and six months, since January 2023.<\/p>\n
Experts unanimously pointed to improved economic growth driven by the semiconductor recovery, consumer price inflation significantly exceeding the 2.0% target, an overheating real estate market in the Seoul metropolitan area, and a persistently high won-dollar exchange rate in the \u20a91,500 range as factors making a rate hike unavoidable. South Korea’s consumer price inflation rate hit 3.2% in June, and consumers’ expected inflation rate for the year ahead remains elevated at 2.8%.<\/p>\n
Expectations for additional hikes within the year are also dominant. Sixteen out of the 20 respondents, or 80%, predicted one more rate increase after July. Many believe the Bank of Korea will take time to assess the policy effects before acting again in October, though some raised the possibility of consecutive hikes in July and August.<\/p>\n
Combined pressures from inflation and the exchange rate are also hastening the Bank of Korea’s decision. The gap between South Korea’s base rate and the U.S. federal funds rate (3.50%\u20133.75%) currently stands at 1.25 percentage points based on the upper bound. If the Bank of Korea raises rates twice this year, the gap could narrow to 1.00 percentage point even if the U.S. hikes once. However, Lim Jae-kyun, a researcher at KB Securities, noted, “The primary driver of won weakness is not the interest rate differential but supply-and-demand factors such as foreign investors selling domestic stocks. It will be difficult for the Bank of Korea to stem the foreign selling tide through rate hikes alone.”<\/p>\n
Meanwhile, the large-scale dollar conversion associated with SK Hynix’s ADR (American Depositary Receipt) listing on the U.S. stock market is seen as a variable that could ease depreciation pressure on the won in the short term. Researcher Lim said, “SK Hynix is reportedly converting currency over a 20- to 30-day period, and this demand is expected to keep won depreciation pressure subdued through the August Monetary Policy Board meeting.” Some experts suggest that this downward pressure on the exchange rate, combined with back-to-back rate hikes in July and August, could maximize the stabilizing effect on both the currency and inflation.<\/p>\n
Regarding the U.S. Federal Reserve’s rate path for the remainder of the year, expectations of a hold were dominant. Sixty percent of respondents in the Seoul Economic Daily survey predicted rates would remain at current levels. The assessment is that the Fed will find it difficult to move hastily given coexisting concerns over inflation and a slowing labor market.<\/p>\n
The average forecast for South Korea’s real GDP growth this year, as provided by the experts, was 2.76%, revised upward from the previous survey’s 2.53%. The average consumer price inflation forecast was 2.85%. Amid these macroeconomic trends, market attention is now shifting from “whether rates will rise” to “how much further they will go.”<\/p>\n
Concerns over the aftermath of rate hikes are also considerable. Given that the share of floating-rate loans has already surpassed 75%, a full-fledged rate-hiking cycle could sharply increase the principal and interest repayment burden on households. Rising funding costs for self-employed individuals and small businesses could weigh on domestic demand, where recovery remains sluggish. Joo Won, head of research at the Hyundai Research Institute, warned, “With only semiconductors booming and domestic demand weak, a hasty rate hike risks a stock market crash, making the burden difficult to withstand.”<\/p>\n
Nevertheless, the Bank of Korea maintains that it pursues monetary policy based on aggregate economic indicators, while mitigating shocks to vulnerable sectors is the role of fiscal policy. Cho Young-moo, head of the NH Financial Research Institute, assessed, “While high exchange rates and high interest rates could deepen extreme polarization, the Bank of Korea’s stance is that narrowing these gaps should be addressed through fiscal policy.” The Monetary Policy Board’s decision is expected to determine the direction of lending rates, the bond market, and the won-dollar exchange rate.<\/p>\n","protected":false},"excerpt":{"rendered":"The Bank of Korea is set to raise its base rate at the Monetary Policy Board meeting on…\n","protected":false},"author":2,"featured_media":84691,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[456],"tags":[845,12729,846,3846,45155,45154,2397,275,25496,850],"class_list":["post-84690","post","type-post","status-publish","format-standard","has-post-thumbnail","category-bank-of-korea","tag-bank-of-korea","tag-base-rate","tag-bok","tag-consumer-prices","tag-fixed-rate-loans","tag-floating-rate-loans","tag-monetary-policy-board","tag-sk-hynix","tag-u-s-federal-reserve","tag-won-dollar-exchange-rate"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/84690","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/comments?post=84690"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/84690\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media\/84691"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media?parent=84690"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/categories?post=84690"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/tags?post=84690"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}