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U.S. rate hike presses Korea

June 16,2017
As expected, the U.S. Federal Reserve raised its key interest rate by 0.25 percentage points. It also maintained its stance to raise the rate one more time this year and three times next year. If the Fed lifts the rate in the second half, the gap between the central rate between the United States and Korea will be widened, further pressuring Korea to raise its own key rate.

If the U.S. benchmark rate surpasses Korea’s, then foreign capital will flow out of the Korean market.

Above all else, the rise in interest rate would deal a heavy blow on small and midsize companies including small business owners. It also will escalate the situation involving mounting household debt in Korea, which is considered a ticking bomb for the economy. The amount of household debt, which stood at a mere 200 trillion won ($177.8 billion) after the financial crisis skyrocketed to around 1,359 trillion won as of March 2017. It was a result of the local real estate market being heated up by the low interest rates. Rapid interest rate hikes could dismantle the financial market and worsen the condition involving household debt. According to the Hyundai Research Institute, a 0.25 percentage point hike in rates could raise interest by 420,000 won per year for each household. Another risk factor is the number of apartment units set to be ready for move-in soon, including 230,000 by the end of this year.

To minimize the impact of the U.S. rate hike, economic leaders must get the household debt issue under control. Lee Ju-yeol, governor of the Bank of Korea, recently hinted at the possibility of an interest rate hike and said, “we may need to adjust the degree of monetary easing.” It was an appropriate signal given that the prolonged monetary easing was the fundamental reason behind the current household debt issue. The government has to come up with comprehensive measures to handle the issue, earlier than August set by President Moon.

The government and financial authorities must not be lax on preemptive restructuring. They must pick and choose in advance so that sturdy midsize companies will not experience any shortage of capital when the interest rate rises.

JoongAng Ilbo, June 16, Page 34