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The Bank of Korea comes under growing pressure for an interest rate hike after the U.S. Federal Reserve raised the benchmark rate by a quarter point Wednesday for the third time this year. The action put the U.S. rate at 1.25 percent to 1.5 percent on par with that of Korea.
It is inevitable that the BOK will ramp up the key rate ― at least twice ― next year as the Fed hinted at more rate hikes, possibly three. It is hard to rule out the possibility of the U.S. rate going higher than Korea's. If this should happen, Korea may face an outflow of foreign capital, which could destabilize the financial market.
The BOK needs to overhaul its monetary policy which has long been focused on accommodating economic growth with easy money. It only increased the rate by one-quarter of a point to 1.5 percent last month for the first time in six years and five months.
The long period of monetary easing was designed to help reinvigorate the nation's stagnant economy. But it has not been without side effects. One of the most severe downside risks is the soaring amount of household debt.
Household debt skyrocketed to 1,419 trillion won ($1.3 trillion) in September, up 34.3 percent from the same month in 2014, according to BOK data. Many individuals have borrowed excessively to buy homes, creating a property bubble.
Now the party is coming to a close. The nation must tighten its belt. The household debt has already become a ticking time bomb. Nobody knows what would happen if the bomb explodes. The BOK should have raised the interest rate earlier. But it has dragged its feet.
The central bank should take pre-emptive action as far as monetary policy is concerned. But it is still doubtful whether it will do so. It only said in a financial stabilization report that the nation can endure burdens arising from a 1 percentage point hike in lending rates. It will only prove to be too optimistic if the BOK fails to adopt the right policy mix.
