(EDITORIAL from Korea Times on March 17)
Tougher challenges ahead
Prepare for Bank of Korea's eventual rate hike
The era of low interest rates is coming to an end faster than expected. Korea _ a small and open economy _ has no other choice but to face tougher challenges.
On Wednesday, the U.S. Federal Reserve raised its benchmark interest rate by a quarter point to a range of 0.75 percent to 1 percent. This was the first increase since President Donald Trump took office in January and only the third in a decade.
The rate hike, which reflects the Fed's confidence in America's economic recovery, has been widely expected as officials there have hinted at a hike in recent weeks. Before that, however, the general forecast was that the U.S. central bank would begin raising rates in May or June.
The Bank of Korea (BOK) appears to have no immediate plans to lift its key rate that has been frozen at 1.25 percent since last June. But given that the United States is expected to conduct at least another two increases this year, the BOK's problems could run deep.
That's because the U.S.-Korea interest rate gap could be reversed during the latter half of this year, which might trigger a rapid outflow of foreign capital. This will bring sizable repercussions in our financial market.
Raising its own benchmark rates is also an option hard for Korea to choose in the near future. The nation's household debt, the ticking time bomb of Korea Inc., has already surpassed 1,300 trillion won. Low-income families would take the brunt of the rate hike due to their wide exposure to high-interest loans from non-bank financial institutions. Debt-ridden small companies would also go belly-up in droves as they can no longer borrow low-interest loans.
Although the BOK has frozen its policy rate, market-driven interest rates have already been spiking, apparently influenced by America's string of rate hikes. This is why our policymakers should map out elaborate measures to prepare for the central bank's eventual rate increase.
The top priority should be given to managing the household debt problem well so its detonator won't explode amid a greater interest burden. Multiple debtors and self-employed business owners are most vulnerable to the rate hike because they rely heavily on high-interest loans from non-bank institutions. There must be extraordinary measures for them.
In a worst-case scenario where a plunge in housing prices coincides with rate increases, a massive amount of mortgages might become insolvent, rattling our financial system. The government should do whatever it can to ensure financial stability.
What is more disturbing is that monetary policy will no longer be effective in boosting the ailing economy. More active fiscal tools must be mobilized to keep our growth momentum intact.
What is needed most is for the government to give warning signals to the financial market and debtors so they can brace for forthcoming risks.