SEOUL, Oct. 23 (Xinhua) -- Worries emerged in South Korea about higher borrowing costs amid rising expectations that the country's central bank could raise its benchmark interest rate by the end of this year, damaging economic growth and increasing debt-serving burden for households struggling with massive debts.
According to the Bank of Korea (BOK)'s documents submitted on Monday for the parliamentary audit of government ministries, the bank estimated a 25-basis-point rate hike would reduce the country's gross domestic product (GDP) growth by 0.05 percentage points.
It was based on an evaluation of track records, and the real effect would vary according to economic and financial situations at home and abroad, the bank said. The country's GDP growth posted an identical figure of 2.8 percent in 2015 and 2016.
Estimates for slower economic growth came amid mounting expectations for the BOK's rate increase as early as in November.
The U.S. Federal Reserve was widely projected to lift its benchmark rate from the current range of 1.00-1.25 percent, possibly in December.
If the BOK's belated rate increase leads to the reversal of policy rates between South Korea and the United States, foreign capital could abruptly flow out of the South Korean financial market.
BOK Governor Lee Ju-yeol told the parliamentary interpellation session Monday that the basis stance was to lessen the current level of accommodative monetary policy when the economy gets back to an active recovery track.
The governor selected as detailed conditions for the active recovery the headline inflation converging towards the BOK's inflation target of 2 percent and the economy recovering at the growth potential rate, which is estimated to hover from 2.8 percent to 2.9 percent.
South Korea's consumer price inflation stayed above 2 percent for three months through September, and the BOK revised up its 2017 growth forecast for the economy by 0.2 percentage points to 3 percent last week.
The BOK froze its policy rate at an all-time low of 1.25 percent for 16 months to October, but it was not a unanimous decision as one of the seven-member monetary policy board claimed a 25-basis-point rate increase.
The central bank tended to send a signal for policy change by unveiling a minor opinion about a couple of months before changing the rate. Two months before the BOK's rate cut last June, a BOK board member demanded a lower policy rate.
The BOK's next rate-setting meeting was scheduled for Nov. 30. If there is no unexpected event, the rate could be raised by the end of this year.
Amid the growing expectations for higher interest rate, concerns were forecast to get strong about household debts keeping a record-breaking trend.
As the BOK lowered its benchmark borrowing costs from 3.25 percent in July 2012 to 1.25 percent in June last year, households rushed to purchase new homes with borrowed money.
According to the BOK documents submitted to the National Assembly, the ratio of household debts to disposable income stood at 155 percent as of end-June. The rate continued to rise from 136.4 percent as of end-2014 to 142.9 percent a year later and 153.4 percent at the end of 2016.
The rapid increase was attributable to faster growth in debts than income among households. The annualized rising rate of household debts posted 6.5 percent in 2014, 10.9 percent in 2015 and 11.6 percent in 2016 each, while the figures for household income came in at 4.6 percent in 2014, 5.8 percent in 2015 and 4 percent in 2016 respectively.
Higher interest rate would increase the number of households failing to pay back loans. The number of households, which were at risk for failing to repay debts, was 1,263,000, or 11.6 percent of the total households, as of the end of March in 2016.
It was up 15.1 percent compared with a year earlier. Debts owed by the risky households rose 18.8 percent to 186.7 trillion won (165.2 billion U.S. dollars) in the same period.
The number of households, which borrowed debts from at least three lenders, reached 3,881,000 as of end-June in 2017, up 214,000 from a year earlier. The multiple-loan borrowers had an average debt of 115.8 million won, totaling 449.6 trillion won.
