[Financial Stability Update] Rising Market Interest Rates Increase Household and Corporate Interest Burden by 1 Trillion Won

Bank of Korea Analyzes Increased Interest Burden Due to Rising Market Rates Since July Last Year
Household Interest Burden Up by 416.4 Billion KRW, Corporate Interest Burden Up by 546.8 Billion KRW

[Asia Economy Reporter Kim Eunbyeol] Since July last year, as market interest rates have risen, the additional interest burden on households and businesses has been estimated at around 1 trillion KRW. Although there are many concerns that the market interest rate increase, driven by expectations of economic recovery, will lead to a heavier loan interest burden, the Bank of Korea believes that the interest burden on economic agents with existing loans is still less than expected.

According to the "Financial Stability Report (March 2021)" released by the Bank of Korea on the 25th, applying the average increase in short-term benchmark interest rates (+8.1bp, 1bp=0.01 percentage points) since July last year to the outstanding balance of variable-rate loans, it was found that the interest burden on households increased by 416.4 billion KRW and on businesses by 546.8 billion KRW.

As market interest rates rose, the average interest rate on household loans increased by 0.08 percentage points. The average interest rate on mortgage loans rose by 0.06 percentage points, while the interest burden on other loans, including credit loans, increased by 0.09 percentage points.

The average interest rate on business loans increased by 0.09 percentage points, with the average interest rate for small and medium-sized enterprises (SMEs) rising by 0.09 percentage points, higher than that of large corporations (0.08 percentage points). The interest burden also increased by 452.3 billion KRW for SMEs, whereas the increase for large corporations was only 94.9 billion KRW.

The Bank of Korea viewed that although market interest rates rose, their correlation with short-term benchmark interest rates, which directly affect loans, was low.

However, a Bank of Korea official explained, "In the case of fixed-rate loans linked to long-term benchmark interest rates, the increase in loan interest rates for new borrowers may be relatively large." Additionally, they forecasted, "If market expectations regarding the base interest rate path change, or if macroprudential policy tightening or increased credit risk causes the risk premium to rise, the increase in interest burden could expand."