BOK signals possible rate hike as leverage, inflation risks grow
A recent report by Korea’s central bank noted that increased leveraged stock market trading and rising home prices in Seoul may further heighten volatility.
A sign showing information about loans is seen at a bank branch in Seoul on June 24.YONHAP
The Bank of Korea (BOK) on Wednesday signaled that a key rate increase may be needed, citing growing risks from leveraged stock investments and renewed expectations of rising housing prices in greater Seoul.
"There is a need to raise the key rate at an appropriate time, while taking into account inflationary pressures, economic conditions and financial stability risks," the central bank said in its Financial Stability Report for the first half of the year, released on Wednesday.
The report is intended to assess the stability of the financial system and potential risks. As it is unusual for the BOK to explicitly include monetary policy guidance in the report, the move suggests growing concern over financial stability risks.
The report assessed the domestic financial system as “generally stable” but noted that “volatility in domestic financial and foreign exchange markets has increased significantly, while housing prices in greater Seoul have resumed their upward trend and leveraged investment in assets is increasing.”
The Financial Stability Index, which measures short-term financial stress, stood at 17.2 in May, placing it in the cautionary range. The Financial Vulnerability Index, which measures medium- to long-term vulnerabilities, reached 46.0 in the first quarter, above its long-term average of 45.7.
More people are borrowing to invest. As of May, outstanding margin loans and unpaid margin purchases totaled 39.4 trillion won ($25.5 billion). Net assets in leveraged exchange-traded funds amounted to 35.4 trillion won during the same period.
The BOK said a significant portion of the increase in household lending outside of mortgage loans — including unsecured credit loans, overdraft credit lines and loans backed by savings deposits — since the fourth quarter of last year may have flowed into the stock market.
“When prices fall, forced liquidation can lead investors to sell stocks, which further amplifies volatility,” said Chang Cheng-soo, deputy governor at the central bank. “There may also be spillover effects in which even those who didn't invest with borrowed money suffer greater losses.”
Rising property-related lending has also emerged as a source of concern.
A customer consults with a bank employee at a loan desk at a bank branch in Seoul on June 11.YONHAP
Household credit reached 1.99 quadrillion won at the end of the first quarter, up 3.5 percent from a year earlier. The average monthly increase in household loans between January and March was 3 trillion won, rising to 3.5 trillion won in April and 9.3 trillion won in May.
The ratio of household debt to disposable income declined from 139.7 percent in the third quarter of last year to 134.1 percent this first quarter. However, the share of vulnerable borrowers increased from 6.4 percent to 6.7 percent based on the number of borrowers. Based on outstanding loan balances, the share of vulnerable borrowers increased from 4.9 percent to 5.2 percent.
Foreign capital flows are another variable.
"Foreign stock investment outflows since November last year appeared to reflect portfolio rebalancing and profit-taking following gains in stock prices," the BOK said. Net foreign outflows from Korean equities totaled $79.95 billion between January and May. The outflows have also added pressure to the weakening won.
The central bank said higher interest rates could help reduce financial imbalances by lowering risks associated with leveraged investments and rising asset prices. At the same time, it warned that higher rates could increase the risk of financial distress among vulnerable borrowers, small- and medium-sized enterprises and self-employed business owners. It further called for efforts to maintain market stability, policy coordination among authorities, stronger risk management in the non-banking financial sector and structural improvements in vulnerable sectors.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
