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| Bank of Korea Governor Lee Ju-yeol, right, answers questions from lawmakers during a National Assembly audit in Seoul, Thursday. On his left is Finance Minister Hong Nam-ki. Joint Press Corps-Yonhap |
Toughened loan regulation will be announced next week
By Lee Min-hyung
The Bank of Korea (BOK) and financial authorities should bear collective responsibility for the surging household debt and widening financial imbalance here, BOK Governor Lee Ju-yeol said Thursday during a National Assembly audit.
"Any problems induced by the financial imbalance cannot be solved by a single organization, and all the related financial authorities should share the blame," Lee told lawmakers during the annual audit.
Korea's financial imbalance has deepened at an alarming rate since the pandemic began in earnest in March of last year. The central bank had to maintain a record-low interest rate to help revitalize the economy. But the financial imbalance has worsened in Korea because a growing number of households took advantage of cheap loans to purchase assets.
Recognizing the urgent need to address the problem, the BOK increased the key rate by 25 basis points to 0.75 percent in August for the first time since the pandemic started. The central bank is also set to push for another rate hike in November, hoping to control the rapid rise in household debt.
But the move continues to cause disputes over the so-called "policy mismatch" between the monetary authority and the Ministry of Economy and Finance, as the latter sticks to an expansionary policy to minimize post-pandemic economic damage across the nation.
The BOK governor repeatedly signaled an additional rate hike before the end of this year. As the rise in the benchmark rate will result in a gradual reduction of market liquidity, the central bank expects the move will bring the household debt growth under control.
This move is in contrast to the finance ministry's expansionary fiscal policy, under which the government decided to put together a record-high national budget worth 604.4 trillion won ($513.34 billion) next year. The finance ministry is also executing a series of expansionary budgets to provide financial support for the self-employed and offer emergency relief funds to the public.
Despite the expansionary fiscal policy, Finance Minister Hong Nam-ki acknowledged the need for the rate hike amid escalating inflationary woes here. He recently said that Korea's 2021 inflation outlook would top the 2-percent level despite its earlier projection of 1.8 percent.
Hong also remained optimistic over the BOK's recent decision for the rate hike, saying that it will soon "take effect" on the financial market.
This was the first time in about three weeks that Lee and Hong sat face-to-face, after they held a macroeconomy and finance meeting late last month to discuss a series of financial agenda items here, such as the household debt and widening volatility in the local asset market.
Lee also repeated his intention to normalize the BOK's monetary easing stance, even if the rate hike may increase the interest burden on some households.
"I cannot say for sure whether there will be a further rate hike, but our forecast is that there will be no difficulty in raising the rate in November," he said.
The Financial Services Commission (FSC) is also set to announce a package of tightened regulatory measures sometime next week to reduce the rapid rise in household debt. The measures will include details on the debt service ratio (DSR), through which households can only take out a certain amount of loans in proportion to their yearly income.
The DSR regulation is widely seen as part of the incumbent administration's final policy option to restrain people from a buying spree of apartments here amid the years-long surge in housing prices.
"We are going to introduce measures that financial firms can use independently to control household debt and protect customers," FSC Chairman Koh Seung-beom said during the Assembly audit.
