The South Korean government this month will up ceiling for public loans to low-income and indebted consumers and purchase of corporate bonds as a part of measures to cushion the negative effect from rises in market rates after another hike in U.S. interest rates.
The government held an economic policy meeting Thursday after the U.S. Federal Reserve raised the key interest rate by another 25 basis points to push the short-term target to a range of 0.75 percent and 1.00 percent after a similar move in December. The Fed as in December indicated a combined three hikes throughout the year, which would place interest rates in the dollar zone higher than Korea’s benchmark rate at 1.25 percent.
“Our economy is confronting unprecedented uncertainties. The government and related offices will work closely with extraordinary resolution to keep our financial and foreign exchange markets stable,” Choi Sang-mok, vice finance minister said at the meeting.
The government within the month will draw up measures to ease livelihoods of indebted consumers and companies and also come up with loan support program for self-employed businesses within the first half.
Financial authorities in a separate meeting reiterated they will keep “thorough” watch on financial market conditions and risk factors.
“The markets are relatively stable as the Fed action and indication were in line with expectations,” said Jeong Eun-bo, vice chairman of the Financial Services Commission (FSC) in a joint meeting with the Financial Supervisory Service.
The yield on three-year government bond ended Thursday at 1.695, down 6.4 basis points from the previous session, after the Bank of Korea reiterated that Korea’s monetary policy will not “mechanically” follow the U.S. counterpart. The Korean Composite Stock Price Index closed Thursday at 2,150.08 points, up 0.8 percent or 17.08 points from the previous session. The dollar fell 1.26 percent to 1,132.50 won.
“What we fear most of all is the household debt loan translating into a (financial) system risk if market yields go up and volatility in the financial market increases," Jeong said.
“We will toughen endeavors to rein in the excessive growth in household debt,” he said. Authorities will toughen supervision on the non-banking sector where household debt spiked following stricter bank loan regulations.
The country’s household credit reached a record high of 1,344.3 trillion won ($1,188 billion) last year through fresh historic annual gain of 141.2 trillion won, according to the Bank of Korea data.
The current outstanding balance of household loans is estimated at 1,350 trillion or above, given that the household loans extended by banks grew by 3 trillion won during the first two months of this year and loans by non-banking institutions rose by 3 trillion won in January alone.
The BOK estimates a rise of lending rate by 1 percentage point would push up household interest burden by 9 trillion won.
To help companies that would find fund-raising harder upon higher borrowing rates, the government will have policy lenders purchase their bonds of up to 2.2 trillion won. The ceiling for public purchase of issues by small and mid-sized companies will be upped to 600 billion won from current 500 billion won. If market jitters spread to investment-grade bonds, the government will immediately launch a bond market stabilization fund, Jeong said.
By Kim Gyu-sik and Boo Jang-won
[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]