The ongoing rise in U.S. long-term interest rates is contributing to high domestic market and loan rates, deepening the Bank of Korea's concerns regarding monetary policy. While there remains a need for interest rate hikes to curb inflation, housing prices, and household debt, the elevated market rates are increasing financial burdens on households and businesses.
As of September 29, the five major banks in South Korea (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) reported fixed-rate mortgage rates ranging from 4.89% to 6.88%. The upper end of this range is nearing 7%, while the lower end is approaching 5%.
The five-year bank bond (AAA) rate, used as a benchmark for mortgage loans, reached 4.64% on the same day, marking the highest level since October 2023. Even if the base rate remains unchanged, the rise in market rates could increase the interest burden on borrowers.
In a briefing on the 'Financial Stability Situation (September 2026)' held on September 22, the Bank of Korea analyzed the burdens on economic entities due to rising interest rates. It estimated that a 0.25 percentage point increase in the base rate would raise household interest burdens by approximately 3.3 trillion won and corporate burdens by about 3.7 trillion won.
On August 27, the Bank of Korea's Monetary Policy Committee raised the base rate from 2.75% to 3.00%, an increase of 0.25 percentage points. According to the minutes from that meeting, committee members considered inflation trends, economic recovery, financial stability, and the burdens on vulnerable sectors due to interest rate hikes. Future monetary policy decisions are expected to take these factors into account comprehensively.
Although the household debt-to-GDP ratio fell to about 81% by the end of the second quarter, the Bank of Korea does not believe that this decline alone sufficiently alleviates household debt burdens. The recent decrease in the ratio was influenced by an increase in nominal GDP due to strong semiconductor exports.
The growth of household debt and the trend in housing prices in the metropolitan area remain significant variables for financial stability. Even committee members who supported the interest rate hike cited the rising housing prices and increasing household debt as factors to watch from a financial stability perspective.
In addition to financial stability, the burden of interest rates is likely to be a consideration for monetary policy in terms of growth. Higher interest rates can increase the cost of financing for corporate loans and bonds, potentially leading companies to adjust or delay their investment plans.
Investment in semiconductors, a key component of the domestic economy, is showing resilience, bolstered by a global increase in artificial intelligence (AI) investment. The Bank of Korea's September monetary credit policy report, released on the 10th, predicts that global AI investment will increase by 61% to 95% this year, with the potential for double-digit growth continuing into the following year.
However, it cautioned that insufficient verification of AI investment profitability or increased reliance on external funding could lead to deteriorating financial conditions and credit risks for related companies. The ability of strong semiconductor exports and investments to absorb the impact of rising interest rates will be crucial.
The correlation between U.S. long-term interest rates and domestic long-term rates is also a variable influencing domestic financial conditions. An analysis by the Bank of Korea's Economic Research Institute, released on the 20th, indicated that global inflation shocks significantly contribute to the synchronization of long-term interest rates between South Korea and the U.S.
External shocks are analyzed to propagate to domestic long-term rates through market expectations regarding future central bank policies. However, the Bank of Korea believes that since policy expectations are a primary transmission channel, it can mitigate the synchronization of domestic rates through communication with the market.
* This article has been translated by AI.
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