Korea faces rising rate pressure as U.S. resumes monetary tightening

The U.S. Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points on Wednesday, local time, returning to monetary tightening after a three-year, two-month pause.

The European Central Bank (ECB) also raised rates on September 10, while the Bank of Japan (BOJ) is expected to follow suit on Friday, suggesting that tighter monetary policy is spreading globally.

The rate hike widened the U.S.-South Korea interest-rate gap to 1 percentage point, based on the upper ends of their target ranges, after it had narrowed to 0.75 percentage point last month.

A wider gap puts upward pressure on the won-dollar exchange rate. The won, which had strengthened since July and briefly fell to the low 1,330-won range this month, weakened back to the 1,380-won range following the Fed’s decision.

The Bank of Korea, which raised rates in both July and August, now faces greater pressure to tighten further this year.

The Fed’s dot plot showed that 12 of 18 Federal Open Market Committee (FOMC) members expect the policy rate to reach 4-4.25 percent by year-end, 25 basis points above its current level, pointing to the possibility of another hike.

Beyond the interest-rate gap, inflation and household debt are also factors that could prompt further tightening by the BOK.

A key concern is the rising interest burden on households.

Household credit exceeded 2,000 trillion won ($1.4 trillion) for the first time at the end of the second quarter, including highly leveraged property and stock investments.

Some Wall Street analysts have warned that the S&P 500 could undergo a correction of up to 10 percent following the rate hike. A simultaneous rise in borrowing costs and stock-market losses could sharply increase the burden on leveraged investors.

Mortgage rates at commercial banks have already topped 7 percent, raising concerns that highly leveraged homebuyers could struggle to make payments and be forced to sell their homes, potentially triggering broader financial instability.

With tighter monetary policy expected to persist, households and businesses need to adjust quickly. Reducing debt rather than taking on new loans is prudent in a rising-rate environment, while excessive borrowing should be avoided.

The government should also prepare measures to support vulnerable borrowers and small and midsize companies facing financial difficulties.