Household, self-employed debt raises alarm as BOK raises key rate to 3%

The Bank of Korea's recent decision to raise its key interest rate to 3 percent has sparked concerns among financial analysts regarding the financial stability of vulnerable borrowers, such as the self-employed and households. The self-employed debt and delinquency rates have surged to record highs, while the total household credit has reached an unprecedented 2,000 trillion won ($1.45 trillion), marking its first occurrence.

With a significant portion of these loans bearing variable interest rates, the increase in borrowing costs could exacerbate the financial strain on vulnerable borrowers and heighten the risk of defaults. The central bank's policy rate was increased by 0.25 percentage points to 3 percent during the Thursday policy meeting, which was the second consecutive hike following its rate increase in July.

The consequences are likely to be particularly challenging for self-employed borrowers, as both their outstanding debt and delinquent loans have hit record levels, accompanied by delinquency rates at alarming rates. This could potentially intensify their interest burden and the likelihood of defaults. A borrower expressed frustration, stating that their loan interest rate is already at 6 percent.