Rising interest rates pose a risk to the global economy, said South Korean Finance Minister Hyun Oh Seok, whose country is grappling with record household debt.
The speed and degree at which major economies taper monetary stimulus and the “interest rate increases that will follow should always be monitored,” Hyun, 63, said in an interview in Washington D.C., where finance and central bank officials from Group of 20 nations are meeting. Foreign-exchange rates are set by economic fundamentals and capital flows, he said, declining to comment on the won’s level.
South Korea’s economy faces headwinds from a gain in the won that Credit Suisse Group AG said could see continued support despite Bank of Korea intervention. Record household debt, with more than 80 percent of mortgages set to floating rates, also poses risks to Asia’s fourth-biggest economy, as global yields face upward pressure amid the winding down of stimulus by the Federal Reserve.
“The G-20 needs to take into account spillover effects of developed economies’ policy changes” and the potential for the effects on developing economies to “spill back” to the rest of the world, Hyun said.
The won rose 0.5 percent to 1,035.35 per dollar in Seoul yesterday, marking a third week of gains, after reaching its highest level since August 2008 the previous day, according to data compiled by Bloomberg.
South Korea’s exports increased 5.2 percent in March from a year earlier, the biggest gain for that month since 2011. The government is counting on improving domestic demand and overseas shipments to drive an acceleration in growth this year, even as it cites risks from potential volatility in capital flows as the Fed pares stimulus and China’s economic expansion slows.
The economy may achieve 4 percent growth this year, Hyun said, in line with the latest forecast by the BOK, which on April 10 kept its key interest rate unchanged while signaling a brighter outlook that could lead it to consider tightening.
While weakness in emerging economies and Fed tapering are risks, growth will pick up to near potential and inflation will accelerate into a target range this year, said Governor Lee Ju Yeol. The BOK may consider lifting its rate when demand starts to drive consumer price pressures, Lee said.
The governor’s “hawkish” remarks prompted Goldman Sachs Group Inc. economist Kwon Goohoon to drop his call for a rate cut and instead forecast the central bank would remain on hold this year.
The BOK will raise its benchmark rate to 2.75 percent by the first quarter of next year from 2.5 percent now, according to the median forecast of 17 economists in a Bloomberg News survey. Fifteen of the estimates were as of March 25.
Higher rates could put pressure on households, which had 1,021.3 trillion won ($986.4 billion) in home loans and credit outstanding at the end of December. Just 15.9 percent of mortgage loans had fixed rates at the end of 2013, the Financial Services Commission said in a statement on Feb. 27.
The government is seeking to increase the portion of fixed-rate, amortizing mortgages to 40 percent of total mortgages by 2017, a plan that requires borrowers to refinance at higher rates. Hyun, in a Feb. 21 interview, said the likelihood of systemic danger from household debt wasn’t high.