A double shock of high inflation and high interest rates has hit South Korea's economy. Consumer prices rose 3.1% in August from a year earlier, returning to the 3% range for the first time in two months, Statistics Korea said on the 2nd. At the same time, government bond yields in the United States, Japan and other major economies have surged to record levels, adding to upward pressure on domestic rates. The pickup in prices, which had shown signs of easing, was driven largely by a base effect from last year's telecom fee discounts. But the burden from the Middle East war remains: excluding the effect of government controls on oil prices, the inflation rate reached 3.6%. Turmoil in global financial markets from the resumption of fighting between the United States and Iran is another strain. On the 1st, amid high oil prices and concerns over deteriorating public finances in major economies, the U.S. 10-year Treasury yield jumped to 4.81%, and Japan's 10-year yield broke above 3% for the first time in 30 years. British and German 10-year yields also hit their highest levels in more than a decade.
With the Bank of Korea having taken the unusual step of raising its base rate for two consecutive months, a global high-rate tsunami on top of that threatens a direct blow to companies and, above all, to households carrying more than 2,000 trillion won in debt. According to the Credit Counseling and Recovery Service, nearly 100,000 borrowers unable to repay their debts received debt restructuring in the first half of this year alone. If price and rate pressures intensify, more vulnerable borrowers could be pushed to the edge. The picture is no different for businesses. As loans to small and midsize firms sour rapidly, non-performing loans at banks swelled to 18.9 trillion won as of the end of June, the highest in eight years. If the burden accumulating at the economy's weak links bursts under high inflation and high rates, the possibility that the entire financial system is shaken cannot be ruled out.
Amid all this, the government has finalized next year's budget at a record 820.9 trillion won. Even though the Bank of Korea sharply raised its growth forecasts to 3.3% for this year and 2.9% for next year, President Lee Jae-myung has stuck to an expansionary fiscal stance, saying the country is now in a "growth lean season." If the government loosens fiscal policy in a way that stokes prices and offsets monetary tightening, the central bank will have no choice but to keep rates high for longer to rein in inflation. Households and companies will bear that burden in full. The loss of external credibility that a mismatch between monetary and fiscal policy could bring also warrants caution. What is urgent now is managing rate and debt risks, not pursuing growth through fiscal spending. The government should refrain from excessive spending and work with the Bank of Korea on policy coordination for stable monetary management.
