Recent changes in the bond market indicate a significant shift. Government bond rates are rapidly approaching the 4% mark across all maturities. Despite over 30 trillion won in foreign capital inflows since South Korea's inclusion in the World Government Bond Index (WGBI), the upward trend in interest rates shows no signs of slowing. The market is already discussing a new reality, one that signifies not just a rise in rates but the end of the low-interest era and the beginning of a high-interest new normal.
Many still perceive interest rates primarily as a tool for economic adjustment—lowering them during downturns and raising them when inflation rises. However, the ongoing changes are far more structural.
The South Korean economy has effectively grown under a low-interest regime for the past two decades. Following the global financial crisis, central banks worldwide injected massive liquidity, which expanded even further after the COVID-19 pandemic. Money was abundant, and interest rates were low. Households increased borrowing, and businesses expanded investments through loans. Asset markets, including real estate and stocks, thrived on this ample liquidity.
However, the situation is changing.
Factors such as energy price volatility from the Middle East, supply chain restructuring, increased investment in artificial intelligence (AI) infrastructure, and the rise of global protectionism are all contributing to inflationary pressures. There is no longer a guarantee that inflation will remain stable around 2% as it once did. The U.S. Federal Reserve prioritizes inflation control over rate cuts, and the Bank of Korea is likely to maintain a tightening stance.
The AI era, in particular, demands more capital than anticipated. Building data centers, semiconductor factories, power grids, and communication infrastructure requires astronomical investments. Consequently, the market will demand more funds, which will inevitably lead to upward pressure on interest rates in the long run.
The problem is that the structure of the South Korean economy is still aligned with the low-interest era.
Household debt remains among the highest in the world relative to gross domestic product (GDP). Memories of excessive borrowing and investment are still fresh. Even a 1-2 percentage point increase in interest rates can significantly reduce household consumption capacity. Some vulnerable borrowers are already struggling with interest payments, let alone principal repayments.
The situation for self-employed individuals is even more dire. Many who survived the COVID-19 pandemic through debt are still burdened with high levels of borrowing. Their revenues have not returned to pre-pandemic levels, while financial costs continue to rise. High interest rates are not just numbers; they are a reality that determines business closures and survival.
Businesses are not exempt either. In the past, low interest rates made it easy to secure funding. Now, the costs of issuing corporate bonds are rising, and refinancing burdens are increasing. Small and medium-sized enterprises face pressures to cut back on investments and reduce employment simultaneously.
A more significant issue lies with the government.
South Korea's fiscal management has also been designed around the premise of low interest rates. National debt has rapidly increased, and demands for welfare and fiscal spending continue to grow. However, as interest rates rise, so do the costs of servicing government bonds. Ultimately, the burden on future generations will only increase.
Yet, interest rates cannot be artificially lowered.
We remember the excessive liquidity management failures following the 1980s' three-low era, which led to distortions in the real estate and asset markets. Failing to control inflation will result in even greater costs. This is why the Bank of Korea is considering tightening measures.
Therefore, what is needed is not to prevent interest rate hikes but to develop strategies to adapt to the high-interest era.
Households must reduce their reliance on excessive leverage. The era where asset accumulation through debt was the norm is coming to an end. Businesses should shift their focus from debt-driven management to enhancing productivity and technological competitiveness. The government must also prioritize fiscal soundness and enhancing growth potential over short-term economic stimulus.
Above all, a shift in perception is crucial.
We have grown too accustomed to cheap money for too long. However, the market is now sending a different message. A 4% government bond rate is not just a number; it signals that the South Korean economy is transitioning to a new order.
The high-interest new normal is not a matter of choice; it is a reality that has already begun. What is needed now is not to resent interest rates but to devise new survival strategies that align with the changed environment.
The era of low interest rates is ending. Now, the South Korean economy must prepare for an era defined by interest rates.
* This article has been translated by AI.
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