As the Bank of Korea begins its cycle of interest rate hikes, attention is turning to the impact on household interest burdens and the asset market. If rates continue to rise, borrowers will face increased costs, while deposit rates are expected to climb. However, asset prices in stocks and real estate may remain elevated depending on economic conditions and supply-demand dynamics.
According to financial sources, the Bank of Korea will hold a monetary policy committee meeting on the 27th to decide whether to adjust the current base rate of 2.75%. Last month, the bank raised the rate from 2.50% to 2.75%, an increase of 0.25 percentage points. The market anticipates the possibility of one to two additional rate hikes in the remaining monetary policy meetings this year.
During a period of rising base rates, households typically feel the changes first in loan and deposit interest rates. Generally, when the base rate increases, market rates rise, putting upward pressure on bank lending and deposit rates. However, the actual impact varies by product and depends on the reference rates and banks' funding conditions.
Borrowers with variable-rate mortgages or credit loans will feel the effects of rising rates more quickly. As loan rates increase, existing borrowers will see their interest burdens grow, while the borrowing capacity of new borrowers will decrease.
Conversely, rising rates will positively affect deposit and savings rates. As banks increase their deposit rates, interest earnings will rise, encouraging savings. However, the extent to which the base rate increase is reflected in deposit rates may vary by bank and product.
Higher interest rates also affect consumption and investment. As the burden of loan principal and interest repayments increases, households' disposable income decreases, and companies may delay investments due to higher financing costs. A slowdown in consumption and investment can lead to reduced inflationary pressures over time.
Typically, rising interest rates exert downward pressure on asset markets. Higher rates tend to dampen investment demand fueled by loans. However, this time, the simultaneous effects of economic recovery and supply-demand imbalances suggest that rising rates may not immediately lead to falling asset prices.
In particular, while rising loan rates may reduce housing purchasing power, factors such as supply and demand, income, and buyer sentiment also play significant roles. If these factors remain strong, home prices could maintain their current levels or even rise further despite higher rates.
Interest rate hikes also influence exchange rates and inflation. As domestic rates rise, the attractiveness of investing in won-denominated assets increases, contributing to a stronger won, which can lower import prices and ease inflationary pressures. However, exchange rates are affected by various factors, including U.S. monetary policy and global dollar flows.
Kim Sang-bong, a professor of economics at Hansung University, stated, "Generally, rising interest rates exert downward pressure on asset prices, but currently, other factors such as economic conditions and inflation are having a more significant impact, leading to stable or rising asset prices. He added, "While rising rates can dampen consumption, the effects are more pronounced for households with fewer assets or higher debt levels. In the future, interest rate decisions should consider the overall economic situation, including employment, growth, and inflation."
* This article has been translated by AI.
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