Timely measures needed for sustainable growth
On Thursday, the Bank of Korea (BOK) hinted at an interest rate hike within this year, raising its 2021 growth outlook to 4 percent from its February forecast of 3 percent. However, the central bank left its benchmark policy rate unchanged for the time being at a record low of 0.5 percent in a bid to maintain its accommodative monetary policy amid the prolonged COVID-19 pandemic.
The BOK move prompted the yield rate for three-year treasury bonds to go up 0.038 percentage points to 1.162 percent the following day. The upward move was not surprising given that market interest rates, including those for household loans, have already begun to rise. It is time for the nation to take pre-emptive steps to minimize the potential devastating impact from the huge amount of household debt, which hit a record high of 1,765 trillion won ($1.58 trillion) in the first quarter of the year as a result of the pandemic’s economic fallout.
The rise in the market interest rate will inflict more of a financial burden in interest payments for indebted households. According to the BOK, a loan interest rate rise of 1 percentage point will incur an additional 11.8 trillion won in interest payments for these households. A large number of debt-ridden households are feared to suffer from any potential interest rate hike by the BOK.
The Hyundai Research Institute cited the debt-ridden economy as one of toughest challenges the country will face in the second half of the year. It said in a report Sunday, “The surge in debt in the public and private sectors amid efforts to cope with the coronavirus has weakened the nation’s fiscal soundness and will likely hurt the national economy in the months to come.”
Against this backdrop, the BOK’s indication of a rate increase is seen as a warning against the soaring debt. However, BOK Gov. Lee Ju-yeol said that such a hike would depend on the pace of economic recovery. He was noncommittal as to when the central bank would begin winding down its monetary easing. Yet, the BOK needs to work out timely and appropriate measures to prevent the ticking debt time bomb from exploding suddenly.
Despite the growing concern about the debt, the ruling Democratic Party of Korea (DPK) has floated the idea of expanding fiscal spending through an additional extra budget. Rep. Yun Ho-jung, floor leader of the DPK, cited the need for the supplementary budget, saying it would play “a super lubricant role for our economy.”
The DPK should take a cautious approach toward further fiscal expansion. The party needs to closely consult with the relevant authorities on how to ensure a soft landing for the national economy. What is important is to take proper measures to achieve sustainable growth without hurting the nation’s fiscal health and causing an inflationary spiral. It is equally important to work out steps to prevent the bursting of bubbles which have formed in such assets as real estate and cryptocurrencies following the monetary easing and expansionary fiscal policy in the face of the pandemic.
On Thursday, the Bank of Korea (BOK) hinted at an interest rate hike within this year, raising its 2021 growth outlook to 4 percent from its February forecast of 3 percent. However, the central bank left its benchmark policy rate unchanged for the time being at a record low of 0.5 percent in a bid to maintain its accommodative monetary policy amid the prolonged COVID-19 pandemic.
The BOK move prompted the yield rate for three-year treasury bonds to go up 0.038 percentage points to 1.162 percent the following day. The upward move was not surprising given that market interest rates, including those for household loans, have already begun to rise. It is time for the nation to take pre-emptive steps to minimize the potential devastating impact from the huge amount of household debt, which hit a record high of 1,765 trillion won ($1.58 trillion) in the first quarter of the year as a result of the pandemic’s economic fallout.
The rise in the market interest rate will inflict more of a financial burden in interest payments for indebted households. According to the BOK, a loan interest rate rise of 1 percentage point will incur an additional 11.8 trillion won in interest payments for these households. A large number of debt-ridden households are feared to suffer from any potential interest rate hike by the BOK.
The Hyundai Research Institute cited the debt-ridden economy as one of toughest challenges the country will face in the second half of the year. It said in a report Sunday, “The surge in debt in the public and private sectors amid efforts to cope with the coronavirus has weakened the nation’s fiscal soundness and will likely hurt the national economy in the months to come.”
Against this backdrop, the BOK’s indication of a rate increase is seen as a warning against the soaring debt. However, BOK Gov. Lee Ju-yeol said that such a hike would depend on the pace of economic recovery. He was noncommittal as to when the central bank would begin winding down its monetary easing. Yet, the BOK needs to work out timely and appropriate measures to prevent the ticking debt time bomb from exploding suddenly.
Despite the growing concern about the debt, the ruling Democratic Party of Korea (DPK) has floated the idea of expanding fiscal spending through an additional extra budget. Rep. Yun Ho-jung, floor leader of the DPK, cited the need for the supplementary budget, saying it would play “a super lubricant role for our economy.”
The DPK should take a cautious approach toward further fiscal expansion. The party needs to closely consult with the relevant authorities on how to ensure a soft landing for the national economy. What is important is to take proper measures to achieve sustainable growth without hurting the nation’s fiscal health and causing an inflationary spiral. It is equally important to work out steps to prevent the bursting of bubbles which have formed in such assets as real estate and cryptocurrencies following the monetary easing and expansionary fiscal policy in the face of the pandemic.
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