Roundup: S. Korea's central bank indicates further rate hike after Fed's rate increase

SEOUL, Dec. 14 (Xinhua) -- South Korea's central bank on Thursday indicated a further policy rate hike after the U.S. Federal Reserve raised its benchmark interest rate overnight.

Bank of Korea (BOK) submitted a financial stability report to the National Assembly, saying a rise of 1 percentage point in lending rate would not become a big debt-servicing burden for households and companies.

The report came after the Fed lifted its benchmark rate by a quarter percentage point to a range of 1.25 percent to 1.50 percent.

The BOK raised its policy rate by 25 basis points in November to 1.50 percent from an all-time low of 1.25 percent, but it became equal to the upper range of the Fed's policy rate, putting pressure on the South Korean central bank to raise its key rate again to avoid a possible foreign capital exodus.

Following the first rate increase in almost six and a half years in November, the BOK indicated a gradual rate hike next year as a rapid growth in borrowing costs would increase debt-servicing burden for households.

Household debts increased 10.1 trillion won (9.3 billion U.S. dollars) in November alone, marking the fastest monthly expansion in 12 months. The debts owed by households topped 1,400 trillion won (1.3 trillion U.S. dollars) as of the end of September.

The ratio of disposable income to household debts stood at 155.5 percent as of end-September, up 2.1 percentage points from the end of last year.

If the BOK raises its benchmark rate belatedly on concerns about household debts, South Korea's benchmark rate could be lower than the Fed's policy rate. It could trigger foreign capital exodus out of the South Korean financial market.

A rapid rise in the BOK's policy rate would increase debt-servicing burden for South Korean households, which have rushed to purchase new home with borrowed money amid the protracted low rate trend. It was a dilemma for the BOK for long.

The BOK report said a rise of 1 percentage point in rates for loans to households would raise the debt-servicing ratio (DSR) by an average of 1.5 percentage points.

It meant 1-percentage-point hike in lending rate would increase the amount of principal and interest to be paid back per year by 1.5 million won (1,380 U.S. dollars) for those having an annually disposable income of 100 million won (92,000 U.S. dollars).

The report, however, noted that multiple homeowners would probably face a bigger interest repayment burden if lending rates pick up in the future.

The number of multiple homeowners reached 1.98 million, accounting for 14.9 percent of the total homeowners. The annualized growth rate of multiple homeowners averaged 5 percent from 2013 to 2016.

As for companies, the ratio of operating profit to interest repayment would fall from 9.0 to 7.9 if corporate lending rate is raised by 1 percentage point.

Despite the fall, it was higher than an average of 4.8 tallied between 2012 and 2016. It meant companies can bear the interest repayment with operating profit.

The BOK report said both households and companies can manage the 1-percentage-point rate hike, noting that economic recovery in the future could help offset the negative effect from higher interest rate. Enditem