Fed's First Rate Hike in Three Years Tests Korea's Debt Defenses

The U.S. Federal Reserve raised its benchmark interest rate by 0.25 percentage point in a unanimous vote on the 16th, shifting to tightening for the first time in three years and two months. Fed Chair Kevin Warsh said the clear fact is that inflation is too high and has persisted for too long, adding that current financial conditions can hardly be described as tight. He left the door open to further increases. The Fed cited high inflation, solid growth and strong employment as reasons for the hike.

The decision is a clear signal that the global economy has turned from monetary expansion toward tightening. It tells the world economy, which has sustained growth on low interest rates and fiscal expansion, that it must now adapt to high rates and tighter conditions. The European Central Bank has raised rates twice this year, and the Bank of Japan — which lifted rates in January and June — is expected to add another 0.25 percentage point on the 18th. The U.S. 10-year Treasury yield has topped 5%, and Japan's 10-year yield has climbed above 3% for the first time in 30 years, evidence of how much the financial environment has changed.

For the South Korean economy, this is an urgent threat. If a prolonged Middle East war, rising energy prices and global tightening converge, the country could be buffeted by a wave of high interest rates and high inflation. The Bank of Korea, which raised its policy rate in both July and August this year, has signaled further increases. Above all, household debt exceeding 2,000 trillion won and corporate loans approaching 2,000 trillion won are a detonator that could magnify bad debt. A sharp rise in interest costs could dampen private consumption and corporate investment, leading to more financial distress and a downturn in the real economy. As the gap between Korean and U.S. rates widens, the risk of foreign capital flowing out must also be watched.

What matters is the government's grasp of the situation and its ability to act pre-emptively. It should accelerate capital soundness tests for banks, insurers and other financial firms, and prepare in advance so that sound companies do not fall into temporary liquidity crises. It is particularly troubling that delinquency rates at regional banks have hit their highest level in a decade amid slowing local economies and deteriorating conditions at construction firms. With interest payments on treasury bonds alone reaching 30 trillion won this year, the government must also tighten its fiscal belt. Monetary tightening is a warning that the government, companies and households in Korea need to buckle their high-rate seat belts. It is time to build the breakwater for the real economy without a single gap.