It is unwelcome news for many indebted households in the country that mortgage interest rates have been rising recently. The increase in the interest rates for home-backed loans extended by major banks has ranged from 0.23 percent to 0.68 percent over the past month.
This trend is expected to continue for the coming months, with the U.S. Federal Reserve set to raise rates in the second half of this year.
Household debt soared to an all-time high of 1,099 trillion won ($992.1 billion) as of end March, up 11.6 trillion won from the end of last year, according to data compiled by the Bank of Korea. It is natural that calls are rising for the government to step up efforts to slow the growth of household debt.
Before interest rates rise further, household debt needs to be managed at a proper level to avoid a credit crisis being triggered. The ballooning debt will also make it difficult to increase consumer spending to help revive the economy as Korea’s exports remain sluggish due to faltering global demand and a weak Japanese yen.
The Ministry of Strategy and Finance is likely to revise down its growth forecast for this year by 0.5 percentage point to 3.3 percent later this month. This downgraded outlook will still be higher than forecasts by other economic institutes.
Earlier last month, the state-run Korea Development Institute slashed its 2015 growth projection to 3 percent from 3.5 percent and the Bank of Korea cut its forecast to 3.1 percent from 3.4 percent. Many private-sector think tanks are predicting the economy will expand at below 3 percent.
The Bank of Korea needs to take a cautious approach to additional rate cuts. When it decided to freeze its key rate at 1.75 percent last month, the central bank’s monetary policy committee noted that household lending by banks had increased “at a level substantially exceeding that of recent years.”
Differentiated approaches are needed now to reduce the risk of household debt over a long term. It may be unnecessary to tighten regulations on loans to middle-income earners seeking to buy a home. But the government should not push banks to lower hurdles for lending money to low-income people. Support for them needs to be covered by fiscal means.
