Bond Yields Fluctuate Amid Possibility of Interest Rate Hike Within the Year
[Asia Economy Reporter Kim Jin-ho] There is speculation that the Bank of Korea (BOK) will expedite the base interest rate hike due to the impact of the surge in household debt relying on ultra-low interest rates. Although raising the base rate will increase household interest burdens, the side effects caused by the steep increase are no longer tolerable. On the 27th, the BOK hinted at a 'base rate hike within the year,' causing market interest rates to already fluctuate.
According to the BOK on the 30th, as of the end of March, the outstanding household credit in South Korea reached 1,765 trillion won. This is the highest level since statistics began in 2003.
Compared to the end of the first quarter of last year, the early stage of COVID-19 (1,611.4 trillion won), household credit increased by 15.36 trillion won (9.5%) in one year. Despite comprehensive regulations by financial authorities, household debt is rapidly increasing due to historically low interest rates.
In particular, in the first quarter of this year alone, mortgage loans (outstanding balance of 931 trillion won) increased by 20.4 trillion won, and other loans including credit loans (outstanding balance of 735 trillion won) also rose by 14.2 trillion won.
As household debt has significantly increased, the BOK appears to be preparing to raise the base interest rate within the year.
Lee Ju-yeol, Governor of the BOK, said at a press conference after the Monetary Policy Committee meeting on the 27th, "The rapid increase in household debt is quite concerning. While raising interest rates inevitably increases the burden on households, if the increase in household debt continues, the side effects will be too great, and correcting it later will require a higher cost, so it is necessary to curb the growth." This is interpreted as a sign that the timing of the base rate hike may be brought forward.
After the Monetary Policy Committee meeting, bond yields showed signs of fluctuation. On the 28th, in the Seoul bond market, the 3-year government bond yield closed at an annual rate of 1.162%, up 3.8 basis points (1bp = 0.01 percentage points) compared to the previous day. The 10-year, 5-year, and 2-year yields also rose by 2.1bp, 3.5bp, and 3.2bp, respectively, recording annual rates of 2.132%, 1.673%, and 0.957%.
With market interest rates already elevated due to expected inflation (price pressure) and the possibility of a base rate hike being discussed, the pace of loan interest rate increases in the banking sector is likely to accelerate further. According to the BOK, the overall household loan interest rate in April was 2.91%, the highest level in 15 months since January last year (2.95%).
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