The Bank of Korea has raised interest rates while financial authorities have expanded loan availability, raising concerns that conflicting monetary and financial policies could diminish their effectiveness in managing household debt.
On August 27, the Bank of Korea's Monetary Policy Committee increased the base rate from 2.75% to 3.00%, marking the second consecutive hike. This decision was driven by stronger-than-expected economic growth and inflationary pressures, alongside the rising household debt, which has surpassed 2,000 trillion won.
This move contrasts sharply with the financial authorities' recent adjustments to household loan growth targets announced in the August 13 measures. The target was doubled from 1.5% to 3%, effectively increasing the lending capacity of financial institutions by approximately 30 trillion won. Authorities are currently working on distributing the increased loan limits.
Financial authorities emphasize that this is not an indiscriminate expansion of loans but a 'selective easing' focused on group loans and financing for genuine borrowers. However, group loans still fall under household loans. If the additional limits are utilized, the total household debt could rise, potentially stimulating housing demand.
The Bank of Korea aims to suppress loan demand by raising the cost of borrowing, while financial authorities are increasing supply limits. Given that there remains significant demand for loans despite rising interest rates, the easing of limits could lead to an increase in household debt. Critics argue that the financial authorities' actions may partially offset the tightening effects of the Bank of Korea's rate hikes.
Bank of Korea Governor Shin Hyun-song stressed during a press conference that monetary policy and macroprudential policies must align. He stated, "The Bank of Korea cannot ensure financial stability on its own; we must maintain financial stability through harmonious policies with financial authorities."
Continued policy misalignment could create confusion in the market. Increasing supply limits while simultaneously attempting to curb loans may blur the priorities in managing household debt. Growing doubts about policy coordination could also undermine trust in these measures.
Professor Kim Dae-jong of Sejong University warned, "In a situation where household debt has exceeded 2,000 trillion won, excessively expanding the total loan volume could diminish the effectiveness of debt control through interest rate hikes. A sophisticated management approach is needed to alleviate the financial difficulties of genuine borrowers without linking household debt to real estate speculation."
* This article has been translated by AI.
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