Korean household debt estimated to top $1.5 tn

South Korea’s household debt was estimated to have exceeded $1.5 trillion to reach a record high last month, and tighter monetary policies at home and abroad are expected to add to debtors’ financial burden. A one percent point rise in market interest rates is predicted to ramp up local household borrowing costs by some $10 billion.

The household debt was assessed to be around 1,810 trillion-1,830 trillion won ($1.53 trillion-$1.55 trillion) as of end-July, according to calculations based on data from the Bank of Korea (BOK) and the Financial Supervisory Service (FSS).

In the first quarter, outstanding household credit including mortgages and consumer credit totaled 1,765 trillion won, up 9.5% on the year, BOK data showed. Household loans in the April-July period rose by 49 trillion won, according to the FSS.

The rise in the country’s household debt has been accelerating, logging growth every quarter from a year earlier.

The fallout from the debt is likely to worsen as central banks including the BOK and the US Federal Reserve are expected to tighten policies to cut liquidity. The Fed may start scaling back its massive asset purchase program in November, investment banks including Goldman Sachs predicted. The central bank may outline tapering at its annual economic symposium in Jackson Hole, Wyoming, later this month, some speculated.

RATE HIKE EVEN IN AUGUST?

The BOK is likely to join the policy shift, becoming the first central bank in Asia to raise interest rates. Some even expected an interest rate hike as early as its policy meeting on Aug. 26 to support  financial authorities’ efforts to slow growth in household debt.

Rising inflation added to such expectations. Consumer inflation has been higher than 2% since April, adding to predictions that the annual inflation rate will run above the central bank’s target of 2%, for the first time since 2012, on a jump in commodity and agricultural product prices. On the other hand, the BOK may take a cautious stance as a spread in the Delta variant of COVID-19 is likely to quell growth in Asia’s fourth-largest economy, some analyzed.

Market interest rates, however, jumped reflecting the rate hike expectations even though nothing has materialized yet. Interest rates for credit loans of the country’s top four banks – Kookmin Bank, Shinhan Bank, Hana Bank and Woori Bank – stood at 2.96-4.01% per annum as of Aug. 19. The rates were 1.99-3.51% in July 2020.

A one percentage point rise in interest rates for personal loans was estimated to increase household borrowing costs by 11.8 trillion won, according to a lawmaker. Floating rate loans consisted of 85.5% among new loans of local banks in June, the highest in about seven and a half years. Higher borrowing costs usually cut consumer spending and weigh on the broader economy.

Some argued the BOK needs to raise the policy interest rate before  households are squeezed even further.

Koh Seung-beom, the incoming financial regulatory chief and former BOK monetary policy board member, suggested the benchmark rate should be raised by 0.25 percentage points from a record low of 0.5% at last month’s rate review.

Koh said continuous growth in household debt may raise the financial burden to an excessive level that prevents the BOK from normalizing the rate.

Write to Ik-Hwan Kim at lovepen@hankyung.com
Jongwoo Cheon edited this article.