SEOUL, Jan. 7 (Korea Bizwire) – An interest rate hike of just 0.25 percentage points will likely cause the household debt service burden to rise by 1.9 trillion won (US$1.6 billion) per year, hurting consumer spending and affecting overall growth, the central bank said Thursday.
In a report submitted to Rep. Park Won-suk of the minor opposition Justice Party, the Bank of Korea (BOK) said if a quarter percentage point hike takes place, the biggest impact will be felt by households that make up the top 20 percent of the country’s income earning bracket.
These households, which have taken out the most loans, could see interest payments rise some 900 billion won in a one-year period.
For households in the bottom 20 percent of the earning range, the increase will reach 100 billion won.
The BOK said that because the amount borrowed is commensurate with earnings and assets, the more income a person earns, the greater the interest payment burden.
The central bank added that in the event interest rates go up by 0.5 percentage points, the household debt service burden will reach 3.3 trillion won, with the number spiking to 7.7 trillion won if it rises 1 percentage point.
The increase in interest payment burden can prevent funds from being used elsewhere that can impact consumption and eventually growth. Weak consumption is worrisome for Asia’s fourth-largest economy since exports have contracted in the face of the overall global economic slowdown.
There are growing predictions that if the U.S. Federal Reserve continues to mark up interest rates in the coming months, Seoul will be forced to follow suit or see an outflow of capital.
Nothing is set, but sources predicted the country’s base rate might start moving up towards the latter part of this year.
The U.S. central bank marked up interest rates by 0.25 percentage points in December from zero. The South Korea key rate currently stands at a record low 1.5 percent.
Related to such possible developments, BOK Governor Lee Ju-yeol told financial sector leaders on Tuesday that rising household debt is a source of concern since it can limit growth. He stressed that the government and financial market regulators needed to work closely to ensure that there is no hard landing.
However, Yoo Il-ho, who has been tapped to become the country’s next finance minister, saw the matter differently.
Ahead of a parliamentary confirmation hearing, Yoo said the top 40 percent of the country’s income earners held 70 percent of the debt, and that these people held 2.2 times more financial assets than debt, making it unlikely that they will default on payments.