The first national audit of the Bank of Korea, led by Governor Shin Hyun-sung since his appointment, is expected to focus on the ongoing trend of interest rate hikes, responses to household debt and the housing market, as well as the exchange rate and economic conditions. Following consecutive rate increases in July and August that raised the base rate to 3.00%, the conditions for further hikes and the burden on households are anticipated to be key issues ahead of the monetary policy committee meeting on October 22.
According to the National Assembly on the 28th, the National Assembly's Finance and Economy Committee will conduct the audit on October 12. This will be Governor Shin's first national audit since taking office in April. The Bank of Korea raised the base rate from 2.50% to 2.75% in July and then increased it by another 0.25 percentage points in August. The base rate has returned to 3% for the first time in a year and a half since February 2025. The Bank has stated in its monetary credit policy report that it will assess inflation, economic trends, and financial stability to determine the timing and pace of any further increases.
The audit is expected to prioritize the impact of interest rate hikes on household debt and the housing market. The Bank recently reported that a 0.25 percentage point increase in the base rate would raise the annual interest burden on households by approximately 3.3 trillion won. The response to rising loan rates typically peaks about five months after a rate hike, while the delinquency rates for households and businesses show the most significant increase about 15 months later. Given the delayed effects of rate increases, how the burden on households from any additional hikes will be factored into monetary policy decisions is likely to be a topic of inquiry.
Particularly concerning is the sensitivity of high-debt households, often referred to as the 'young borrowers' who are heavily leveraged to acquire homes. According to Bank of Korea analysis, a 1 percentage point increase in interest rates raises the delinquency probability for these households by 0.81 percentage points. A 0.25 percentage point increase is projected to raise the proportion of borrowing households with delinquencies by 0.27 percentage points. Last year, 11.1% of households with debt had a debt service ratio (DSR) exceeding 46%.
On the other hand, with inflation expected to exceed target levels, the Bank must also consider the need for tightening measures to stabilize prices. Rate hikes can restrict borrowing, consumption, and investment, thereby alleviating demand-side inflation pressures and stabilizing inflation expectations. The rising housing prices in the metropolitan area and the increasing trend in household loans remain financial stability risks, making the division of roles between the management of the base rate and government loan regulations another anticipated point of discussion.
The exchange rate is also expected to be a significant variable in monetary policy discussions. The recent won-dollar exchange rate has been fluctuating in the mid-1,350s, which is lower than the average of about 1,475 won from January to August this year, indicating a recovery in the value of the won. Both the level of the exchange rate and the recent speed and magnitude of fluctuations may impact inflation and financial markets, which could be addressed during the audit.
Questions regarding the growth trajectory for this year and next are also anticipated. In its August forecast, the Bank of Korea assessed that growth is expected to improve, reflecting a strong semiconductor market and increased investment in artificial intelligence (AI). At the same time, it is monitoring inflation and financial stability risks. Following two consecutive rate hikes, there is keen interest in how the Bank will set future rate paths based on the sustainability of growth and the conditions for inflation and financial stability.
With the next monetary policy committee meeting scheduled for ten days after the audit on October 22, questions regarding variables that could influence rate decisions and the conditions for further increases are expected to arise. There is particular interest in how the Bank will assess the necessity for additional hikes if housing prices and household loan growth continue, as well as how it will evaluate the burden of interest payments on households and the potential for reduced consumption due to rising rates.
* This article has been translated by AI.
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