[Interest Rate Hike Variables] Will Interest Rate Hikes Accelerate... Will Financial Authorities Change Their Stance on Household Debt and Real Estate Measures?

US Treasury Secretary Janet Yellen Hints at Possible Interest Rate Hike
Reconsideration of Easing Domestic Mortgage Loan Ratio Adjustments
Concerns Over Debt Burden Time Bomb for Companies Surviving on Loans

Janet Yellen, Chair of the U.S. Federal Reserve Board (FRB). Recently, she hinted at the possibility of an interest rate hike, drawing attention to whether this will lead to changes in domestic policies.

[Asia Economy Reporter Kwangho Lee] Janet Yellen, the U.S. Treasury Secretary and former Chair of the Federal Reserve, hinted at the possibility of interest rate hikes, drawing attention to whether there will be changes in the domestic household debt and real estate regulation easing policies. If the burden of loan interest rates increases due to an early base rate hike, a review of the policy direction aimed at expanding household loans for actual demanders such as young people and the homeless may become inevitable. Concerns that public opinion on poor management of household debt could grow amid the already rising market interest rates are also factors increasing the authorities' worries.

A financial authority official said on the 6th, "Interest rate hikes have been discussed continuously in the post-COVID process, and there is no immediate change in the authorities' policy stance." He added, "We are strengthening monitoring of risks by factor, including household loans," and "We are prepared to respond promptly if necessary."

Given the possibility of continued market volatility due to concerns over the steep rise in interest rates, related trends will be closely watched, but the existing plans for household debt and real estate measures will be pursued as planned.

Currently, financial authorities are considering measures such as increasing the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) only for low-income and actual demanders, along with easing conditions related to annual income and housing prices.

Some Viewpoints Suggest Possible Reconsideration of Loan Regulation Adjustment Discussions

However, in the market, there is also a view that if Lee Ju-yeol, Governor of the Bank of Korea, signals a base rate hike earlier than expected, discussions on adjusting the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) promoted by the government and ruling party could be reconsidered. This is because concerns about rapid household debt growth and excessive liquidity raising inflation fears may lead the Bank of Korea to proactively raise rates.

A government official said, "Song Young-gil, leader of the Democratic Party of Korea, insists that LTV and DTI should be relaxed up to 90% only for actual demanders, but if interest rate hikes become visible, the authorities could face strong criticism over poor household debt management," adding, "There is a high possibility that the financial authorities' policy direction will be reviewed."

Concerns have also been raised that the aftershocks of interest rate hikes will be severe. A financial sector official said, "If U.S. interest rates rise, the Korean won's value will fall, leading to massive foreign investor withdrawals from the stock market, forcing Korea to raise rates as well," and warned, "In this case, the burden on homeowners with variable-rate loans will increase, potentially causing a recurrence of the house poor crisis."

There are also forecasts that companies and households that have been surviving on loans may default due to interest rate hikes. Professor Park Joo-hyun of Dongduk Women's University’s Department of Economics warned, "If interest rates rise, loan interest rates will increase, increasing debt burdens especially among vulnerable borrowers, which could lead to a major crisis in the financial market and the overall economy."