SK rate cut may worsen household debt issue

CONCERNS are mounting that South Korean central bank’s latest base rate cut may encourage easy borrowing and aggravate the country’s household debt problem.

But others suggest that the government’s enhanced loan regulations and slow economic growth pace will help prevent reckless borrowing.

The total balance of household credit as of the end of June this year stood at 1.5561 quadrillion won ($1.3 trillion), according to Bank of Korea (BoK) data.

Household credit is a comprehensive measurement for household debt that includes loans from financial institutions, as well as unsettled credit card payments.

Last week, the BoK’s ratesetting Monetary Policy Board lowered the policy rate by a quarter of a percentage point to match its lowest level ever, 1.25 per cent.

Conventionally, a base rate cut is expected to boost consumption, increase consumer prices and alleviate the financial burdens that households face. It has also been cited as a key reason for increased household debt.

But the BoK’s previous rate cut in July turned out to have little impact on household debt during the months that followed, data showed.

The household debt balance in August stood at 6.3 trillion won, down 300 billion won from a year earlier, while the corresponding figure in September was 3.1 trillion won, down three trillion won from a year earlier.

The slowing pace at which household debt increased was largely attributable to the government’s strengthened mortgage regulations, which entail lower ceilings for the loan-tovalue and debt-to-income ratios.

The lacklustre economic growth outlook was seen as another factor in discouraging excessive borrowing.

Deputy Prime Minister and Finance Minister Hong Nam-ki has officially said the country’s growth forecast for this year will be lowered to the two to 2.1 per cent range.

“This year’s economic growth will be about the same level forecast by the International Monetary Fund [IMF] and the Organisation for Economic Cooperation and Development [OECD],” Hong said on the sidelines of the Group of 20 ministerial summit and the annual meetings of the IMF and the World Bank.

The IMF recently revised Korea’s growth pace to two per cent, down 0.6 percentage points from its earlier estimation. The OECD slashed its growth forecast to 2.1 per cent, down 0.3 percentage points.

The fiscal chief had acknowledged that the present growth outlook of 2.4 to 2.5 per cent would be hard to achieve, but this was the first time he cited actual figures.