Korea Household Debt Posts Record Gain as Rate Hike Nears

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South Korea’s ballooning household debt set new records last quarter, offering support for views that the central bank will raise interest rates as early as this week to deflate a debt bubble.

Total credit extended to households jumped 10.3% from a year earlier to 1,806 trillion won ($1.54 trillion), according to a Bank of Korea statement on Tuesday. The 169 trillion won increase marked the largest gain since data going back to 2003. 

From the previous three months, credit rose by 41.2 trillion won, the biggest increase for an April-June quarter. 

The growing indebtedness underpins BOK’s concerns that financial imbalances are rising at a pace that may imperil the economy even after it recovers from the pandemic. With government measures failing to rein in household debt, regulators are looking to the central bank to dampen the borrowing frenzy behind soaring home prices.

Economists are split whether the BOK will raise its record-low 0.5% rate when it meets on Thursday. Even if board members opt to hold this week, the consensus points to a hike sometime later this year. One board member called for a 25 basis point hike in July, and minutes showed some board members agreed to an extent on the need to tighten policy. 

Among the 41.2 trillion won of quarterly increase in total credit, household loans accounted for 38.6 trillion won and the rest was from purchases on credit. Among loans, 17.3 trillion won was for mortgages and the rest for other types of lending.  

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