[Interest Rate Hike Risk] Inflation and Low Interest Rates... The Debt Bomb Caught In Between

Faster-than-Expected Economic Recovery Sparks Inflation and Early Interest Rate Hike Speculation

Household Debt at 1,700 Trillion KRW, National Debt at 846 Trillion KRW

Hawkish Views Gradually Emerging in Monetary Policy Committee Minutes

April Export Prices Up 2.2%... Rising for Five Consecutive Months

[Asia Economy Reporters Eunbyeol Kim, Sejong = Sunhee Son] As the economy recovers faster than expected, prices have surged sharply, turning the historically large debt burden into a significant risk. If the massive liquidity released during the recovery coincides with interest rate hikes, it could deliver a critical blow to the Korean economy. On the other hand, maintaining the record-low base interest rate of around 0.50% annually would lead to even more liquidity injection and worsen inflation. The economy is caught in a 'debt trap' where interest rates cannot be raised or lowered.

This concern is also sensed within the Bank of Korea’s Monetary Policy Committee. Recent minutes reveal that the ongoing liquidity expansion is accumulating potential factors that could hinder future financial stability. Considering rising inflation and debt burdens, there are indirect hawkish (monetary tightening preference) signals suggesting the need to bring forward interest rate hikes. This marks a shift from last year when committee members said, "(Given the COVID-19 situation) everyone inevitably has to be dovish (favoring monetary easing)."

Former Bank of Korea Governor Park Seung also stated that an interest rate hike is only a matter of time. In an interview with Asia Economy on the 14th, Park said, "Although economic experts seem to have differing views on the rapid inflation surge, in reality, they all share the same perspective," adding, "Globally, unlimited money has been injected for several years, and eventually, interest rates must be raised and liquidity withdrawn. Anyone you ask will reach the same conclusion." He continued, "Looking at the big picture, inflation is indeed on an upward trend," emphasizing, "It is certain that interest rates must be raised at some point, and the discussion should start now."

With the prolonged low interest rate environment, debt continues to grow, and domestic inflation is rising. By the end of last year, household debt had already surpassed 1,700 trillion KRW, roughly equal to the size of the country’s gross domestic product (GDP). From January to April this year, total household loans across all financial sectors increased by 55 trillion KRW, more than double the 23.8 trillion KRW recorded during the same period last year. The sharply increased national debt, which rose due to increased spending in response to the COVID-19 crisis, is also a burden. As of the end of last year, government-guaranteed debt stood at 846.9 trillion KRW, with an increase of 124 trillion KRW over the past year.

Domestic inflation indicators are all showing an upward trend. The consumer price index for April rose 2.3% year-on-year, marking the first time in two and a half years that the increase exceeded 2%. Core inflation, which reflects the underlying trend of prices, also rose by 1.4%. The export price index for April, announced by the Bank of Korea on the same day, increased by 2.2% month-on-month, marking the fifth consecutive month of growth.