Interest Hike Means Heavier Burden for Indebted Small Firms

An interest rate hike within this year, which now seems almost certain, will put a heavier burden on many of Korea's households shouldering W1.77 quadrillion worth of debt (US$1=W1,131).

Bank of Korea Governor Lee Ju-yeol said last week the present expansionary fiscal policy should be normalized "at an appropriate time within this year."

According to the central bank, household interest payments increase by W11.8 trillion a year for every one percentage point rise in housing and credit loans.

There is a strong chance of a 0.5 percentage point increase in the base rate in the remaining six months of this year through two separate hikes. But market rates could rise first in anticipation.

The increased interest burden is expected to hit small businesses and younger people the hardest. The BOK estimates small business owners took out W777.4 trillion worth of loans as of the third quarter of 2020, and a one-percentage-point increase in the base rate raises their interest burden by W5.2 trillion.

Sung Tae-yoon at Yonsei University said, "A base rate hike will become a huge burden for small business owners who suffered in the coronavirus pandemic and young Koreans who took out loans to make ends meet due to unstable incomes."

The rate hike is expected to hit homeowners harder than stock investors. "The stock market is more sensitive to the economy than to interest rates, but the real estate market, where many people took out loans to buy homes, will take a bigger hit," said Park Sung-wook at the Korea Institute of Finance.