Monetary Policy Board member Jang Yong-sung said further rate increases would be calibrated against inflation, economic conditions and financial stability. The BOK raised its benchmark rate by 25 basis points in both July and August.
Home prices in Seoul and surrounding areas have continued to climb, while expectations of further gains remain elevated and household borrowing could accelerate again, the central bank said.
The BOK’s Financial Vulnerability Index (FVI) rose to 46.5 in the second quarter, marking a ninth consecutive quarterly increase. Deputy Governor Jang Jeong-su told a press briefing that the bank estimates the upward trend continued into the third quarter.
The index combines 64 indicators covering credit, asset prices and financial institutions’ resilience to measure the buildup of medium- to long-term vulnerabilities.
The Financial Stress Index (FSI), which tracks more immediate strains, edged up to 19.5 in August from 19.3 in July, remaining within the BOK’s caution range of 12 to 24.
The FVI gauges vulnerabilities that could amplify an economic downturn when a shock occurs, while the FSI captures more immediate financial stress, said Lim Kwang-kyu, director general of the BOK’s Financial Stability Department.
The simultaneous increase in both indicators warrants continued efforts to contain financial imbalances, he said.
Higher interest rates can restrain borrowing and risk-taking and temper expectations of further housing gains. But rising debt-servicing costs can weaken borrowers with limited repayment capacity as existing loans mature or interest rates reset.
The latest hikes should help ease financial imbalances while gradually increasing default risks among vulnerable borrowers, the report said.
A 25-basis-point rate increase would add about 7 trillion won ($5.1 billion) to households’ and companies’ combined interest burden, Lim said.
The BOK’s analysis found that household and corporate bank loan delinquency rates responded most strongly about 15 months after a rate increase. Vulnerable household borrowers and small and medium-sized companies showed their strongest response sooner, after roughly nine months.
Officials declined to estimate how high delinquency rates could rise next year, saying economic conditions, lending restrictions and government support would also shape the outcome.
Among self-employed borrowers, the delinquency rate climbed to 1.99 percent at the end of June from 1.86 percent at the end of 2025, exceeding its long-term average of 1.60 percent. The rate among vulnerable self-employed borrowers reached 12.71 percent.
Corporate borrowers also showed signs of growing strain.
Marginal firms — companies whose operating earnings failed to cover interest expenses for three consecutive years — accounted for 19.1 percent of externally audited companies in 2025, up 2 percentage points from a year earlier.
The share reached 20.0 percent among small and medium-sized companies. By industry, it stood at 43.7 percent in real estate and 28.4 percent in accommodation and food services.
Vulnerabilities have increased in domestic-demand industries and could translate into greater default risks if the economy faces an external shock, Lim said.
Household debt relative to the size of the economy, meanwhile, has fallen sharply. The debt-to-GDP ratio declined to 85.3 percent at the end of the first quarter from 88.1 percent at the end of 2025 and was estimated at around 81 percent in the second quarter.
The improvement largely reflected rapid nominal economic growth driven by surging semiconductor exports, the report said.
The ratio could fall into the 70-percent range by year-end, below the 80-to-85 percent range at which household debt can begin to constrain economic growth, Jang Jeong-su said.
He cautioned against easing debt controls because rapid nominal GDP growth had not translated into equally broad income gains across households.
On currency markets, the BOK said the won’s recent appreciation did not yet appear excessive.
The decline in the won-dollar exchange rate largely reflected a correction toward economic fundamentals rather than excessive market movement, said Kim Shin-young, head of the BOK’s Foreign Exchange Analysis Division.
Officials said the speed of currency moves matters in either direction and that the central bank was monitoring for excessive one-way flows and would respond firmly if necessary.
South Korea’s financial system remains broadly stable, supported by resilient financial institutions and sound external payment capacity, the report said. It assessed the overall burden of higher rates as manageable given improving economic conditions and financial institutions’ capacity to absorb losses.
Housing, household debt, vulnerable borrowers and renewed financial and foreign exchange market volatility nevertheless remain key risks.
The BOK called for monetary policy and macroprudential measures to work together to contain financial imbalances, alongside targeted fiscal and financial support for vulnerable borrowers.
AJP Takeaways
- Back-to-back rate hikes could ease housing and debt pressures while increasing default risks among vulnerable borrowers.
- A 25-basis-point increase would add about 7 trillion won to household and corporate interest burdens, a BOK official said.
- Delinquency rates responded most strongly about 15 months after a rate increase, compared with roughly nine months for vulnerable households and smaller companies.
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