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By Park Hyong-ki
The era of low interest rates is coming to an end.
The U.S. Federal Reserve and other major global central banks are moving to shift their monetary policy toward tightening from an accommodative stance and the Bank of Korea (BOK) is no exception.
For the first time in six years, the BOK had a dissenting call for a rate hike at its rate-setting Monetary Policy Board meeting on Thursday. BOK Governor Lee Ju-yeol also hinted at a rate hike, saying "conditions are getting ripe" for the bank to end its accommodative policy.
Some analysts bet the bank will raise its rate as early as Nov. 30, at its next monetary board meeting.
"If there is no additional provocation from North Korea, the BOK has sufficient room to raise its key rate next month," Shinhan Investment analyst Yoon Chang-yong said. "I don't think the rate hike will happen just once. The BOK is expected to continue its tightening until the key rate reaches 2 percent throughout next year."
The U.S. Fed's hawkish stance will add extra pressure to the BOK, analysts said. If the BOK raises its key rate next month, it will be the first time in six years. The rate stands at a record-low 1.25 percent.
Brokerages including Daishin Securities and NH Investment & Securities forecast a 0.25 percentage point increase to 1.5 percent next month.
This would keep the rate on an equal footing with that of the U.S. Fed, which is most likely to raise its federal funds rate in December.
Yoon said the BOK's move to tighten monetary policy reflects stronger-than-expected economic growth. "As the BOK revised up its growth forecast to 3 percent, attaining that goal will be possible on strong exports, led by semiconductors," Yoon said.
Analysts said the bank needs to start raising the rate in pre-emptive steps to reduce the negative impact on liquidity in financial and real estate markets.
However, they say a rise in interest rates will put an immense burden on families who bought homes on low mortgage rates. Household debt totals nearly 1,400 trillion ($1,240 billion).
On top of record household debt, rate hikes would adversely affect sluggish domestic consumption and high unemployment.
Only the export of tech parts and products, such as chips and displays, are keeping the economy alive.
Some analysts said a rate hike would be too soon, given a variety of indices showing lackluster figures.
"It would be too early to raise interest rates, as growth is not strong enough to warrant rate hikes," Lee Chang-sun, an LG Economic Research Institute economist, said.
Inflation also remains low, with only agricultural product prices rising due to seasonal and environmental factors.
Consumers can ill-afford to expand consumption as they are saving all they can to pay down their mortgages. A rate hike would further burden them.
The Hyundai Research Institute said a 1 percentage point increase in the BOK's key rate would lead to a 3 percentage point jump in loan interest rates. It expects the interest burden to increase to 4.76 million won a household with mortgages.
Considering more than 70 percent of household debts are in the form of variable interest rate loans, which means the mortgage rate is linked to market rates, this could deal a severe blow to low-income earners.
The government plans to announce a package of steps to reduce household debt this week. Some analysts expect the central bank may wait until the government unveils these measures before it switches to monetary tightening.
