US Interest Rates Soaring: Korea Should Also Prepare for ‘Austerity Pain’

To some extent, it was foreseen, but it has literally come at last. The U.S. Federal Reserve announced on June 15 that it would raise interest rates by 0.75% after the Federal Open Market Committee meeting. It is the first time in 28 years, since 1994, that the Fed has taken such an aggressive interest rate hike. As a result, the U.S. interest rate has reached a level equal to that of Korea (1.75%). This is only the beginning. Fed Chairman Jerome Powell predicted that the rate will double to 3.4% by the end of the year.

Global inflation is a consequence of a supply shortage of raw materials owing to the war in Ukraine, but it is difficult to relax because it is caused by countries competing in quantitative easing after the U.S. financial crisis in 2008. In addition, in South Korea, household debts such as mortgage loans surged as a result of housing policy failure during the five years of the Moon Jae-in administration; financial capacity was rapidly exhausted due to the generous distribution of cash. It is foreshadowed that the quantitative tightening trend that has begun in earnest in the United States will have a more substantial impact on Korea.

The Bank of Korea is facing a dilemma. If interest rates are not raised significantly, foreign funds are expected to flow out. Household debt has already reached 1,895 trillion won ($1,469,801,207,550). The banking sector is raising the interest rate on home mortgage loans, and it is even forecasted to exceed 10% by the end of the year. There are concerns about the collapse of the real estate market and financial insolvency.

Still, it is critical to prevent fluctuations in the capital market by significantly raising the key interest rate above the U.S. level. In addition, a series of soaring import prices and increases in public charges such as electricity and gas are already in line. It is expected that real income will decrease and the burden of interest rates and living expenses will increase, causing national suffering. In particular, low-income earners and the self-employed who have a lot of loans will be hit hard, so special measures are needed. While enduring the crisis, we have no choice but to use this ordeal as a blessing in disguise for economic structural reform, productivity improvement and expansion of the potential growth rate. The government should be honest in taking charge and showing the public that the era of provisional payment is over and that the time has come to endure the pain of austerity.