[Editorial] Debt and rates

South Korea’s combined household debt was at an all-time high of 1.25 quadrillion won ($1.12 trillion) as of June 2016, and is projected to reached a fresh record during the third quarter of this year.

While there is a possibility the nation’s consumer debt will exceed the 1.3 quadrillion mark by the year’s end in the wake of its continuously snowballing pace, policymakers have moved to curb its growth rate.

Last Thursday, the Finance Ministry said it would control the number of houses and apartments supplied on the market and strengthen regulations on mortgages as part of efforts to contain household debt.

With the debt increasing at a fast pace on low interest rates since the first half of 2015, the ministry said it would restrict the supply side of the housing market rather than the demand side to ease the debt problem, as well as housing oversupply.

Financial regulators led by the Financial Supervisory Service plan to enforce that financial firms, involving first-tier banks and secondary banks, assess whether potential homebuyers are qualified to borrow and purchase homes in accordance with their annual income.

The measures come after the Bank of Korea early this month highlighted a problem with households borrowing too much from secondary lenders this year, amid tightened loan restrictions at first-tier banks.

Consumer debt has continued to surge -- 964 trillion won at the end of 2012, 1.01 quadrillion won at the end of 2013, 1.08 quadrillion won at the end of 2014, 1.20 quadrillion won at the end of 2015 and 1.22 quadrillion won as of March 2016.

Officials the BOK have expressed concerns about the mounting debt. This is paradoxical as the nation’s central bank has fueled its growth by continuously lowering the benchmark interest rate over the past two years -- from 2.5 percent to the record-low 1.25 percent.

Both the Finance Ministry and the BOK have accountability for the debt woes though they are now struggling to curtail the growth pace. They were going against the proverb: A stitch in time saves nine.

There are still supporters of further rate cuts. They say that enhanced lending regulations set by the FSS early this year could offset a further monetary easing. They argue the stimulus drive to induce active consumer spending is more urgent for the nation’s economy.

But it is hard to agree with the further easing cohorts given the risky ratio of household debt to national disposable income, which recently surged to 164.2 percent. South Korea ranked No. 9 in the ratio among 27 members of the Organization for Economic Development and Cooperation.

The figure indicates that local consumers on average have less capacity to spend due to their heavy borrowing. In early 2015, the government had eased the mortgage rules to vitalize the real estate market, and the households -- which were attracted to low bank rates -- are saddled with the burden of huge interest payment on housing-collateralized loans.

In early 2014, President Park Geun-hye vowed to curb household debt gradually to bring the debt-to-disposal income ratio down 5 percentage points, compared to the 2014 figure by 2017. On the contrary, the undesirable ratio has steadily increased over the past two years.

The government or BOK might try to placate the public by highlighting possibly relaxed pace in the household loan growth thanks to the financial regulator-led tough mortgage guidelines this year.

Delays in implementing an appropriate monetary policy could impair the nation’s gross domestic product and growth potential, and the BOK should be held accountable for playing a key role in pumping up household debt.

Korea has no choice but to raise interest rates amid the US Federal Reserve’s move toward monetary tightening since late 2015.

It seems the US central bank is just postponing a further rate hike due to the presidential election, slated for November. Fed Chair Janet Yellen revealed a hawkish stance over the weekend, hinting at raising rates later this year.

A core solution is a preemptive rate hike by the BOK, not the ritualistic reinstating of the ordinary mortgage rules from drastic easing. The next gathering for rate-setting of the BOK is scheduled for Sept. 9, while that of the Fed will convene Sept. 20-21.