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Beware the three highs

Dec 02,2017
The Bank of Korea raised the key rate by 25 basis points to 1.50 percent, catching up with the normalization in the rates from the ultra-low levels the United States has kept following the 2008 financial crisis. The markets shook and the Kospi fell below the 1,500 mark on signs of the debt binge coming to an end.

The first concern is household debt. Low interest rates have fueled household debt to a level tantamount to 95 percent of the country’s gross domestic product. Authorities have lost timing in tightening the cap and regulations on mortgage loans eased under the Park Geun-hye administration to stimulate the housing market. Over the last three years, household debt surged by 362 trillion won ($333 billion). At the current rate, the household debt balance is expected to stretch to 1,450 trillion won by the end of the year and over 1,500 trillion won next year.

The economic conditions also call for higher rates. Economies in the United States, the eurozone and Japan have improved with higher employment and exports. Central banks there have begun normalizing rates. “Global economic recovery is picking up. Key economies of the United States , eurozone, and Japan are growing at the estimated pace,” BOK Gov. Lee Ju-yeol said following the rate-deciding meeting. The Korean economy is also picking up. It is estimated to grow 3.2 percent this year and keep up the 3.0 percent pace for two more years.

But the data does not tell the real story. Except for semiconductors and petrochemicals enjoying a global boom, the economy remains sluggish. Real household income has dwindled for two years in a row. Manufacturing output, consumption, and investment data also weakened in October. Unlike other developed markets, job market conditions are worsening. Companies cannot increase investments or hiring because of multiple new measures — a sharp spike in the minimum wage, shorter working hours, conversion of irregular workers to permanent status, and expanded base salary scope — that would push up labor costs.

Higher rates could aggravate the fragile domestic conditions. There are over 3.9 million individuals with low credit and income that are indebted to three or more financial institutions. The corporate sector is no better. Oil prices and the Korean won value are strengthening. The so-called three highs have become a reality. Lee said decisions on additional hikes would be “prudent based on thorough study of growth and inflation trends.”

Jerome Powell, nominated to succeed Janet Yellen as the head of the U.S. Federal Reserve, supports the normalization. The government must ready the economy for the three highs.

JoongAng Ilbo, Dec. 1, Page 34