Of the 8.889 trillion won ($6.2 billion) in new mortgage loans extended by South Korea's five largest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank — in August, 2.3362 trillion won, or 26.3%, carried annual interest rates of 5.0% or higher. That marks a 14-fold increase in eight months from last December, when such high-rate loans totaled just 166.5 billion won. Loans priced above 5.5% a year surged 40-fold, to 761.6 billion won from 18.8 billion won.
Across South Korea's 16 banks, the share of loans carrying rates of 5% or more doubled to 32.5% in August from 14.7% last December. The share of mortgages above 5% rose sharply not only at the five major commercial banks but also at regional lenders including The Jeonbuk Bank, Jeju Bank and BNK Kyongnam Bank.
One driver pushing lending rates higher is a selloff in global bond markets. Sovereign yields are climbing in the United States as well as in European countries including the United Kingdom and France. Rising yields in major economies feed through sequentially to Korean treasury bonds, bank debentures and then deposit and lending rates.
Domestically, a wave of bank debenture maturities is also concentrated in the current period. September through November is typically when banks' refinancing needs cluster, and this year the maturity of large corporate deposits from semiconductor companies has coincided with it. As debenture issuance increased, the yield on five-year bank debentures — the benchmark for fixed-rate mortgages — hit a year-to-date high of 4.655% on the 15th of last month. In response, the Financial Services Commission instructed officials to review in advance the issuance volumes and maturity structures of bank debentures and specialized credit finance company bonds in the fourth quarter to avoid straining supply and demand in the bond market.
Deposit rates have also been rising quickly in recent weeks. Rates on corporate deposits, which account for roughly 70% to 80% of banks' deposit funding, have topped 4%. Some retail deposit products offering more than 4% have also appeared, mainly at regional banks.
The problem is that while the central bank is raising rates to counter high oil prices and inflation, the government is instead expanding spending. One side is tightening the money supply while the government loosens the purse strings, leaving the two out of step. Because the response to inflation relies solely on interest rates, lending rates naturally climb, and vulnerable groups and self-employed business owners take the direct hit in the process. The government has decided to raise total spending next year by a record 12.8% to 820.9 trillion won, and projects that national debt will increase by 106 trillion won to 1,519.8 trillion won.
In particular, if expansionary fiscal policy stimulates demand and pushes prices higher, the Bank of Korea will have to raise rates further. Domestically, with monetary policy being mobilized to rein in home prices, there is a possibility that rates will be kept high for a prolonged period. Kim Jin-wook, an economist at Citi, said that day that "with consumer price gains persisting amid broad inflationary pressure, the BOK will raise its base rate further in November this year and in February next year, bringing the terminal rate to 3.5%."
What matters is the risk of a vicious cycle in which the burden of rate increases is passed on entirely to vulnerable borrowers. Because rate increases affect everyone equally, the burden shouldered by low-income households and small and medium-sized enterprises is relatively larger. The BOK estimates that each 0.25 percentage point increase in rates raises household interest payments by 3.3 trillion won and corporate interest payments by 3.7 trillion won. As of the end of June this year, the delinquency rate on loans to vulnerable self-employed borrowers stood at 12.71%, more than six times the 1.99% rate for self-employed borrowers overall.
Refinancing risk is also growing as rates spike. An official at the financial authorities said, "This is the period when the fixed-rate terms are expiring on five-year hybrid mortgages taken out during the low-rate pandemic era, and with rates rising quickly, countermeasures are needed."
For this reason, some point out that there are limits to taming inflation through monetary policy alone, without a role for fiscal policy. They argue that the pace of fiscal spending should be moderated and that vulnerable borrowers, whose difficulties mount during periods of rising rates, should receive targeted support. The government has also decided to consider further reducing treasury bond issuance volumes depending on market conditions. An official in the financial industry voiced concern, saying, "Not only in Korea but also in the United States, the central bank is raising rates to address inflation even as the government expands fiscal spending," adding that "if fiscal and monetary policy continue to diverge, vulnerable groups could end up bearing a greater burden."
In the United States alone, the probability of a rate increase this month has fallen sharply. According to the CME FedWatch tool at the Chicago Mercantile Exchange, the likelihood of a December hike exceeds 60%, while the chance of a hold this month is above 70%.
Kim Jung-sik, an emeritus professor of economics at Yonsei University, stressed that "if the government continues to run expansionary fiscal policy out of step with monetary policy, side effects such as rising liquidity and higher interest rates could grow," adding that "we will need to prepare for the possibility of a debt crisis driven by high rates and the risk of asset bubbles driven by increased liquidity."
