The US interest rate 0.25P up…Korea in emergency under ‘1350 trillion household dept’
Kang Eun Seong | esther@ | 2017-03-17 10:13:57

Interest rate 0.25P up in 3 months… Actual ‘interest rate increase period’ to begin

The Federal Reserve, the central bank of the USA, has raised interest rates by 0.25 % point in three months. The domestic market interest rate is expected to rise in earnest after the end of the low interest rate era in accordance with American interest rate increase. It is center of attention that the Bank of Korea whether will raise its interest rate or not.

The Federal Open Market Committee (FOMC) of the Federal Reserve``s monetary policy decision meeting has increased interest rates by 0.25% points to 0.75% to 1.00% from 0.50% to 0.75% on March 15 at a regular meeting, which lasted for two days. The rate increase happened only three months after the 0.25% point increase in December last year. The Federal Reserve predicted the two further increases within this year.

As a result, it is analyzed that the Korean domestic market interest rate has also entered increase period. Song Joo-yeong, the professor in Economy and Management department of Jungang University, said, ‘Even though the Bank of Korea has not risen the base interest rate yet, considering the rise in the market of interest rate, the domestic financial market should be considered to have started the interest rate increase in earnest after the end of the low interest rate era.’

The Bank of Korea, earlier, lowered its base interest rate by 0.25% to 1.25% from 1.5% in June last year. In the case of the US raises its interest rates by up to 1.5% through two additional interest rate increases this year, Korea and the US are likely to see reversed interest rates. Also, there is a possibility that foreign capital may shift away from the Korean market under high interest rates.

However, considering current Korean economy, the Bank of Korea does not seem to easily decide to raise the interest rate. A representative of Monetary Policy Committee, mentioned, ‘If we look at the domestic economic situation, we may consider to cut further interest rate to stimulate the economy which is caused slow growth and consumption downturn. Therefore we rather maintain the current interest rate instead of neither increase nor decrease’. He also added, ‘Although there are some pressures to raise interest rates due to the reversal of the US interest rate and the increase in household debt there is little meaning in providing the market a hint that there will be no further interest rate decrease and the current interest rate, which has been maintained for eight months, seems to be maintained further.’

The main problem is the household debt approaching KRW 1350 trillion. The government and financial authorities are expected to continue to monitor household debt management, focusing on debt management in the second financial sector, which surged in 4 quarter last year. On March 16, the Ministry of Strategy and Finance has decided to hold a Macroeconomic Conference under the lead of Choi Sang-mok, the First vice Minister of Finance and Economy to establish a household debt management system to monitor trends weekly. The Bank of Korea under the lead of vice president, Jang Byung-hwa, held ‘Monetary Policy Committee Meeting’. The Bank of Korea stated, ‘We examined the impact on the financial and foreign exchange market under the Federal Reserve’s interest rate increase. And the path to the future was the same as before. Some market participants’ concern on accelerating the interest rate has been greatly eased.’ "

Besides, Chung Eun-bo, vice chairman of the Financial Supervisory Commission, said, ‘We plan to strengthen efforts to prevent excesses of household debt through all business sectors. Considering the steep increase in household lending under the second financial section, we will thoroughly review the field and reinforce risk management and on-site inspection on the second financial section.

The Financial Supervisory Commission will apply the ``Guideline for Credit Evaluation and Advancement``, which has been in effect since last year, for the union with more than KRW 100 billion in assets in the second financial section.
``Guideline for Credit Evaluation and Advancement`` is planned to expand to the second financial sector as of June this year.

In addition, the commission plans to expand the supply capacity of the four major policy financial products such as Smile Finance (Misogumyung), Sunshine Lines(Hessallon), Swing Dreams (Pakwo dreamron), and New hope hall (Sae Himang hollshi) up to 7 KRW trillion won (670,000 persons)

Yun Seok-hun, a guest professor at Business College of Seoul National University, pointed out, ‘The large amount of simple household debt is not a big risk right now, because the majority of the debt is due to the repayment of the debt. The important thing is that how to manage low income households’ dept.’

By Kang Eun Seong, Kong Hyun Jung esther@

[ copyright ⓒ The Digitaltimes ]