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(EDITORIAL from Korea Times on Dec. 2)

All News 09:22 December 02, 2017

Belt-tightening moment
BOK raises benchmark interest rate

The Bank of Korea's raise of the benchmark interest rate from 1.25 to 1.5 percent Thursday means the era of easy money has ended.

The first rate hike in more than six years reflects the central bank's confidence in the economy's growth riding on the global recovery, as shown in brisk exports, robust investments and reviving consumption.

The return to monetary tightening was inevitable, given the U.S. Fed's likely increases in its policy rate next year. The BOK, of course, does not always need to follow the moves of the U.S. However, keeping its rate too low for too long runs the risk of an outflow of short-term capital, or hot money.

The preemptive move by the Korean central bank will have a severe impact on many economic players, however, not least because it would herald the "normalization" of monetary policy. To be hit hardest will be households, self-employed and small and midsize enterprises reeling from swelling debts. The government should take utmost care to prevent their massive defaults.

Household debts have exceeded 1,400 trillion won ($1.29 trillion), an average of 70 million won per family. Government officials estimate the 0.25-percent rise in the key interest rate alone would increase their combined interest payment by 2.3 trillion won. About 320,000 households, which have debts of 94 trillion won, 7 percent of the total, cannot pay back their loans with their income and assets.

Already, the total household debt amounts to 155 percent of Korean families' disposable income. This means even if they spend all of their income on debt repayment, the households can clear off only two-thirds of their debts. A large part of the problem is due to the previous government's irresponsible economic policy, which encouraged people to buy homes by borrowing from banks. The consequent real estate boom has pushed up housing prices to levels beyond the means of most working families.

Monetary tightening is necessary if for no other reason than weaning economic players off easy money or debt-dependent operation. Any hasty return to normalcy might lead to financial turmoil, however. Monetary authorities should remember in this regard that the "lost two decades" in Japan started when the Bank of Japan began to raise interest rates and tightened lending rules, which pushed down home prices and resulted in prolonged recession.

At stake is how to minimize adverse effects by protecting the most vulnerable households and inducing the restructuring of marginal businesses.

The party of abundant liquidity is over, and all economic players ― government, businesses, and individuals ― ought to brace up for an extended period of financial squeeze.

Financial policymakers should closely monitor the money market to keep the low-income families and numerous self-employed at the lowest rung of economic ladder from falling victim to predatory lenders and landlords in the era of austerity.

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