U.S. interest hike pressures household debts of S. Korea

U.S. interest hike pressures household debts of S. Korea. March. 17, 2017 07:13. by Im-Soo Jeong, Eun-A Cho imsoo@donga.com,achim@donga.com.

The key interest rate in the U.S. has recovered to the level of 1 percent, with the interest rate having been raised again merely in three months to put an end to the ultra-low interest rate era. The sudden upturn in the U.S. interest rate sounds alarm to the Korean economy, which is heavily weighed down by the 1,180 billion dollars of household debts.

On Wednesday (local time), the U.S. Federal Reserve (Fed), which serves as the central bank of the U.S., convened a Federal Open Market Committee meeting and raised its key interest rate by 0.25 percentage points from 0.50-0.75 percent to 0.75-1.00 percent. This marks the third time that the Fed has raised the interest rate since it escaped the period of “zero interest rate” in December 2015 for the first time in seven years. This also marks the first hike of the key rate since the inauguration of the Trump administration. As a result, the base rate in the U.S. has recovered to the 1-percent level for the first time in eight years and five months since October 2008 when the financial crisis swept across the world.

It appears that the Fed's latest decision to raise the interest rate again merely in three months reflects its strong confidence in the recovery of the U.S. economy. “The simple message is the economy is doing well,” said Federal Reserve Chairwoman Janet Yellen during a press conference on Wednesday local time.

The Fed announced its plan to raise the interest rate three times a year for the next three years by 2019. The chairwoman said she expects three to four interest hikes this year provided the economy remains on track to recovery. The Wall Street Journal and other news outlets said, “The Fed’s monetary policy has entered a new phase.”

In addition, the Fed’s latest move has narrowed down the gap between the base interest rates of South Korea (1.25 percent per annum) and the U.S. to 0.25 percentage points. Concerns are growing, however, that should the U.S. surpass South Korea in key interest rate, this might lead to a massive exodus of funds from the Asian country to more industrialized economies including the U.S.

Above all, there lurks an alarming prospect that the rising interest rate in the U.S. could prompt a hike in the open market interest rates in South Korea, which in turn could detonate the “fuse” of household debts in the country, which remain in the worst form ever. Small-sized business owners, low-income debtors, and other financial vulnerable individuals who are under extreme pressure from paying off monthly interests will likely be one of the first victims of the consequences.