The U.S. Federal Reserve is indicating the first interest hike in nearly seven years after launching the three-phase quantitative easing program to ride out its financial crisis.
Thanks to the input of an astronomical amount of $4.5 trillion and implementation of a near-zero rate policy, the U.S. economy was at last resuscitated and is seen to be getting back on track.
Last month, Fed chairwoman Janet Yellen said the U.S. economy was recovering enough to raise the key rate within this year, despite sluggishness in the first quarter. Market consensus is that the U.S. will increase the interest rate in September or, at the latest, in December, on a gradual basis.
The Fed’s rate hike would surely signal the change in the global financial system as it is expected to affect monetary policies of major economies like the European Union and Japan, both of which are currently carrying out quantitative easing to revive their sagging economy.
Then what is the likely impact any U.S. rate hike would have on the Korean economy?
Much to our surprise, former U.S. Fed chairman Ben Bernanke predicted that the rate hike will not hurt the Korean economy because it means a “new phase of strength in the U.S. and global economy.”
“Countries like Korea, I think they’re actually very well placed because this is a country that has, in general, a good policy and good institutions,” Bernanke was quoted as saying by Yonhap in a Seoul forum last month.
But some other foreign institutions and experts including International Monetary Fund chief Christine Lagarde are calling for emerging markets’ preparedness for the impact of a rise in U.S. interest rates, pointing out the danger of market volatility.
It is feared that the U.S. rate hike rates could drive the sudden outflow of foreign capital from emerging countries, particularly those with heavy foreign currency-denominated debt with short-term maturities.
But chances of a massive drain of foreign capital from our Korean financial market doesn’t seem as high as the nation has a stronger external current account position and lower inflation, and its financial system is in better shape today than it was in the late 1990s when it was hit hard by an Asian financial crisis that led to an IMF bailout.
The rate hike can also boost Korea’s exports to the U.S., our second-largest trading partner after China, as it means the U.S. economy is improving. Statistically, our exports to the U.S. increased to $23.58 billion for the first four months, up 8.6 percent from the same period last year.
But such an optimistic outlook could be replaced with concerns, especially if the Fed pushes aggressively for additional rate hikes over a short time.
Such a scenario would heighten the possibility that the nation’s soaring household debt will pose as a greater risk to our overall economy.
This is because the U.S.’ sharp rate hike is particularly expected to deal a blow to our mortgage lending market, where floating interest rates and nonamortized loans are common and so vulnerable to external shocks like the rate fluctuation.
According to government data, the nation’s household debt increased to an all-time high of 1,099 trillion won ($992.1 billion) as of the end of March. About 80 percent of household debt is said to come from real estate mortgage loans.
If the U.S. Fed starts to raise its interest rate as it had indicated, our government would be put under pressure to follow suit. Low-income earners who bought houses or started business with loans with floating rates would suffer from more financial difficulties and banks’ financial soundness would deteriorate.
Excessive optimism or concern should be guarded when our government and the private sectors brace for the impact of the looming change in the global financial environment.
By Shin Yong-bae
Shin Yong-bae is the business editor of The Korea Herald. He can be reached at shinyb@heraldcorp.com. ― Ed.
