Interest rate hikes accelerate in South Korea, amplifying warnings on debt-fueled investments

South Korea is experiencing a significant surge in market interest rates, driven by global factors such as elevated oil prices stemming from Middle East tensions and broader inflation concerns. This rise is dampening expectations for interest rate cuts by major economies and is beginning to impact the domestic market, raising fears about household debt and the burden on vulnerable borrowers and businesses.

The upper limit for fixed-rate mortgage loans has now exceeded 7%, with the lower limit surpassing 5%. These levels haven't been seen since late October 2022, a period marked by the Bank of Korea's aggressive rate hikes to combat high inflation and a high exchange rate. Credit loan rates have also climbed, with the lower end now reaching the 4% range, an increase of 0.25 percentage points from two months prior.

Compounding the concern is the continued growth in household debt despite the rising interest rate environment. In the past month, household loans increased by 3.5 trillion won, primarily driven by a 5.5 trillion won rise in mortgage lending, more than double the 1.4 trillion won increase seen in January. The Bank of Korea estimates that a 0.25 percentage point increase in interest rates adds an average of 163,000 won annually to the debt burden of each household borrower. The situation is particularly acute given the high proportion of variable-rate loans in South Korea, which are immediately affected by rate hikes.

Businesses are also facing increased financial pressure, with higher interest expenses and difficulties in raising capital through bond issuance. This, combined with rising raw material costs due to high oil prices and a weak won, exacerbates their challenges. The trend of "debt-fueled investing" (bitu) among individual investors has reached alarming levels, with balances in personal minus accounts at major banks increasing by approximately 1.5 trillion won to 41.3 trillion won. Similarly, credit balance for stock investments has hit a record high of 36.5 trillion won, suggesting investors are borrowing heavily, likely expecting investment returns to outpace loan interest rates. Financial authorities are closely monitoring household debt growth and market volatility, urging households to exercise caution with leveraged investments and manage their risks.