🚨 Market Interest Rates Surge
Today Korean Economic News for Beginners | 2025.11.12
0️⃣ Base Rate Cut Expectations Fade as 700 Trillion Won Super Budget Pushes Bond Yields Higher
📌 Government Bond Yields Surge to 2.8-2.9%... Growing Pressure for Rising Loan Rates
💬 Market interest rates are rising steeply again. While the Bank of Korea delays cutting the base rate due to concerns over real estate market overheating and exchange rate instability, the government's 700 trillion won "super budget" for next year has sharply increased the burden of bond issuance. As a result, the 3-year government bond yield has surged to 2.8-2.9% annually and remains at high levels. Market expectations suggest that the Bank of Korea's rate cut timing will be delayed to the first half of next year, which is likely to lead to higher bank loan rates. Experts warn that "market uncertainty is growing as expansionary fiscal policy collides with tight monetary policy," and "the interest burden on households and businesses will continue for the time being."
1️⃣ Easy Understanding
Market interest rates are rising again recently. While the Bank of Korea is not lowering rates, the government's plan to spend over 700 trillion won next year has increased bond issuance to borrow money. As a result, bond yields have gone up, and bank loan rates are also likely to rise.
Let's first understand the relationship between the base rate and market rates. The base rate is the "reference rate" set by the Bank of Korea. It works like a faucet that controls prices. When the base rate goes down, more money flows into the market, making loans easier and boosting the economy. Conversely, when the base rate goes up, money becomes scarce, loans become harder, and the economy cools down.
However, in recent months, there was an expectation in the market that "the Bank of Korea will soon lower rates." Since the economy wasn't doing well and consumption was shrinking, there were strong voices saying rates should be lowered to revive the economy. In fact, the U.S. Federal Reserve also stopped raising rates and showed signals of cutting them.
But the Bank of Korea hasn't been able to lower rates. Why? There are two main reasons.
First, the real estate market is heating up again. Apartment prices in Seoul and the metropolitan area have started rising again. In this situation, if rates are lowered, loans become easier and people will want to borrow more money to buy houses. Then housing prices could soar even more. Because of the painful experience of real estate prices skyrocketing due to low interest rates from 2020 to 2021, the Bank of Korea cannot easily lower rates.
Second, there's the exchange rate problem. As we saw in previous news, the won-dollar exchange rate exceeded 1,450 won. What would happen if Korea lowered rates now? With the U.S. still maintaining high rates while Korea alone lowers rates, investors would think "it's better to invest in the U.S. than in Korea." Then funds would flow overseas, the value of the won would fall further, and the exchange rate could rise more. When the exchange rate rises, import prices increase and inflation worsens.
For these reasons, the Bank of Korea cannot easily lower rates, and market expectations are that "the rate cut will be delayed to the first half of next year."
In addition, the government's expansionary fiscal policy makes the problem more complex. The government has set next year's budget at over 700 trillion won. This is the largest ever. The purpose is to revive the economy and invest in future industries, but where will they get all this money?
The government issues government bonds to borrow money since taxes alone are not enough. Government bonds are bonds issued by the government - simply put, they are IOUs where the government promises "I'll borrow money and pay it back later with interest."
The problem is, what happens when too many government bonds are issued? Let me give you an example. If a neighborhood bakery makes only 10 loaves of bread but 20 customers come, the price of bread will go up, right? Conversely, if they make 100 loaves but only 10 customers come, the price will go down. Government bonds are the same. When the government issues many bonds, the "supply" increases, and investors say "there are so many bonds, I won't buy unless the terms are better." So the government has to offer higher interest rates, and this is exactly what bond yield increases mean.
In fact, recently the 3-year government bond yield has surged to 2.8-2.9% annually. It was around 2.5% just a few months ago, but it has risen by 0.3-0.4 percentage points. Do you realize how big this change is?
Let's assume Mr. A borrows 200 million won from a bank to buy a 300 million won apartment. When the rate is 2.5%, the annual interest is 5 million won. But when the rate rises to 2.9%, the annual interest becomes 5.8 million won. That's 800,000 won more per year. If he pays it back over 30 years, he would have to pay an additional 24 million won. A small rate difference becomes a huge burden in the long term.
The bigger problem is that when government bond yields rise, bank loan rates also follow. Banks set loan rates based on government bond rates. This is because banks also borrow money to lend out, so they need to charge interest rates higher than their cost of borrowing (funding cost) to make a profit.
Therefore, when government bond yields rise → banks' funding costs increase → bank loan rates also rise. In fact, mortgage loan rates have recently started rising again, and credit loan rates are also increasing.
Who suffers the most in this situation? It's households and businesses that have taken out loans. Especially people who borrowed at variable rates face increasing interest burdens every time rates go up. While their salaries stay the same, the monthly interest they have to pay increases, so their living expenses inevitably decrease.
The same goes for businesses. Companies that borrowed operating funds or investment funds face growing interest burdens, which may lead them to reduce investment or cut employment. Especially marginal companies that can't even pay interest properly face greater risk of becoming insolvent.
Here's another dilemma. The government wants to spend a lot of money to revive the economy (expansionary fiscal policy). But the Bank of Korea cannot lower rates because it's worried about real estate and exchange rates (tight monetary policy). These two policies are going in opposite directions.
This policy collision creates confusion in the market. The government says "spending a lot of money will improve the economy," but the Bank of Korea says "I can't lower rates, be careful." For businesses and households, it's hard to decide what to do.
Ultimately, the current situation means that interest rates will likely remain high for the time being, and loan rates are likely to rise. For young professionals or financial beginners, it's necessary to think about how to respond in this environment.
2️⃣ Economic Terms
📕 Base Rate
The base rate is the reference rate the Bank of Korea uses when dealing with commercial banks.
- It's a key policy tool the Bank of Korea uses to control prices and the economy.
- When the base rate rises, market rates also tend to rise, and when the base rate falls, market rates also tend to fall.
- Korea's current base rate is 3.25%, and cuts are being delayed due to concerns over real estate market overheating and exchange rate instability.
📕 Government Bond Yield
Government bond yield is the interest rate on bonds issued by the government to raise funds.
- When government bond issuance is high, supply increases and yields rise; when demand is high, yields fall.
- Government bond yields serve as a reference for bank loan rates, so when government bond yields rise, loan rates also rise.
- Recently, yields have surged to 2.8-2.9% as the burden of government bond issuance has increased due to the 700 trillion won super budget.
📕 Expansionary Fiscal Policy
Expansionary fiscal policy is a fiscal policy where the government increases spending to encourage economic recovery.
- The purpose is for the government to spend a lot of money during economic downturns to create jobs and increase consumption.
- In the short term, it has an economic stimulus effect, but in the long term, it can lead to increased government debt and rising interest rate pressure.
- When the direction is opposite to monetary policy (interest rate control), policy conflicts can increase market uncertainty.
📕 Policy Mix
Policy mix refers to the combination of fiscal policy and monetary policy.
- When fiscal policy (government taxes and spending) and monetary policy (central bank interest rate control) go in the same direction, the effect is maximized.
- However, if the two policies go in opposite directions, the effects may be offset or cause confusion in the market.
- Currently, Korea is in a situation where expansionary fiscal policy (increased spending) and tight monetary policy (maintaining rates) are colliding.
3️⃣ Principles and Economic Outlook
✅ Mechanism of Increased Bond Supply and Rising Rates
The government's large-scale budget inevitably leads to increased government bond issuance, which means increased supply in the bond market.
First, the basic principle of supply and demand applies. To execute a budget exceeding 700 trillion won, the government must fill the shortfall from tax revenue through government bond issuance. In fact, next year's government bond issuance plan is expected to be around 180 trillion won, a significant increase from the previous year. When such a large volume is poured into the bond market, investors demand higher returns. For example, even for the same 3-year government bond, investors will say "I'll only buy if you give me higher interest" when supply is high. This principle is why government bond yields have risen to 2.8-2.9%.
Second, bond demand has decreased as expectations for base rate cuts have been broken. Investors try to buy bonds in advance when they expect rates to fall in the future. This is because when rates fall, the value of existing bonds that pay high interest increases. However, when the Bank of Korea recently showed signals of delaying rate cuts due to concerns about the real estate market and exchange rates, investors' enthusiasm for buying bonds weakened. As demand decreases, bond prices fall, and when bond prices fall, yields rise. (Bond prices and yields move in opposite directions)
Third, global interest rate pressure is also at work. The U.S. Federal Reserve is slowing the pace of rate cuts, and as recent U.S. economic indicators have come out stronger than expected, U.S. Treasury yields are also rising again. Korean government bond yields are greatly influenced by U.S. Treasury yields. When U.S. rates rise, Korean rates also tend to rise. This is because global capital markets are interconnected.
Rising bond yields are not just a bond market problem, but lead to increased funding costs throughout the economy.
✅ The Trilemma of Interest Rates, Real Estate, and Exchange Rates
The reason the Bank of Korea cannot lower rates is because it must catch two rabbits at once: real estate and exchange rates.
First, the real estate market is showing signs of overheating again. Apartment prices in Seoul and the metropolitan area have been rising for the past few months. The jeonse rate has also increased, leading to more gap investment demand. What would happen if rates were lowered in this situation? As loans become easier, housing purchase demand would surge and housing prices could soar again. Policy authorities who experienced the real estate frenzy of 2020-2021 cannot repeat the same mistake. At that time, low interest rates caused real estate prices to skyrocket, making it even harder for ordinary people to own homes and deepening social inequality. Therefore, the Bank of Korea cannot easily lower rates.
Second, exchange rate instability is also a major obstacle. The won-dollar exchange rate exceeded 1,450 won, recording the highest level in seven months. If Korea lowers rates, the Korea-U.S. interest rate gap will widen further, and investors will move funds to the U.S., which offers higher rates. Then, won demand will decrease and dollar demand will increase, potentially raising the exchange rate further. When the exchange rate rises, import prices increase, which acts as inflationary pressure. When prices of daily necessities like gasoline and food rise, it directly hits the livelihoods of ordinary people. Also, companies with large foreign currency debt face increased repayment burdens.
Third, policy authorities are walking a tightrope between the two. To revive the economy, rates should be lowered, but lowering rates could trigger real estate and exchange rate problems. Conversely, maintaining high rates worsens the economy. This situation is called a "trilemma." It's difficult to achieve three goals simultaneously (economic stimulus, real estate stability, exchange rate stability). Ultimately, the Bank of Korea is delaying rate cuts, which is leading to rising market rates.
Interest rate policy has complex effects on various parts of the economy, so decisions cannot be made by looking at just one goal.
✅ Impact on Households and Businesses
Rising market rates directly burden households and businesses that have taken out loans.
First, household loan interest burdens increase. Korea's household debt exceeds 1,900 trillion won. A significant portion of this is variable rate loans. Variable rates have a structure where loan interest changes according to market rates. If government bond yields rise by 0.3-0.4 percentage points, bank loan rates are also likely to rise by a similar amount. For example, a household that borrowed 300 million won would have to pay an additional 900,000 won in annual interest if rates rise by 0.3 percentage points. That's 75,000 won per month. When interest burdens increase while salaries don't rise, household consumption inevitably shrinks.
Second, companies' investment capacity decreases. Companies also often raise operating funds and investment funds through loans. When rates rise, interest burdens increase, leading them to reduce or delay investment. Especially marginal companies may see their situation worsen as they can't even properly pay interest. As we saw earlier, Korea's marginal company ratio exceeded 20%, and rising rates could accelerate the insolvency of these companies. When corporate insolvency increases, banks' non-performing loans also increase, which can threaten the stability of the entire financial system.
Third, the government's interest burden also increases. Since the government also borrows money by issuing government bonds, when rates rise, it has to pay more interest. If government bond yields rise by 0.3 percentage points and government bond balance is 1,000 trillion won, the annual interest burden increases by 3 trillion won. When more money goes out as interest like this, the money the government can actually spend on policies decreases. Ultimately, the capacity to invest in welfare, education, infrastructure, etc., decreases.
Rising interest rates burden all economic actors, and particularly hit households and businesses with high loan dependency hard.
4️⃣ In Conclusion
The surge in market interest rates is a symbolic event showing the complex dilemma facing the Korean economy. The government has prepared a super budget exceeding 700 trillion won to revive the economy, but this is acting as pressure for rising rates by increasing the burden of government bond issuance. At the same time, the Bank of Korea is delaying rate cuts due to concerns over real estate market overheating and exchange rate instability, creating a situation where expansionary fiscal policy and tight monetary policy are colliding.
This policy collision increases uncertainty in the market and ultimately leads to increased interest burdens for households and businesses. Especially households that borrowed at variable rates and marginal companies will take the direct hit of rising rates. When loan interest increases, household consumption shrinks and corporate investment decreases, which can slow economic recovery.
The bigger problem is that this situation is difficult to resolve in the short term. As long as the real estate market is not stabilized, the Bank of Korea will not be able to easily lower rates, and it's difficult for the government to reduce spending for economic stimulus. Experts predict that the timing of rate cuts will be delayed to the first half of next year, so a high interest rate environment is likely to continue for the time being.
What should young professionals or financial beginners do to respond in this environment? Here are some practical measures.
First, if you're planning to take out a loan, you should consider the risk of rising rates in advance. It's safer to choose fixed rates rather than variable rates, or to reduce the loan amount. It's risky to buy a house or invest with excessive loans.
Second, if you've already taken out a variable rate loan, it's important to convert to a fixed rate or pay down the principal little by little. Since rates may rise further, efforts to reduce the interest burden are necessary.
Third, you should secure sufficient emergency funds. Since unexpected interest burdens may arise due to rising rates, it's safe to hold at least 3-6 months' worth of living expenses in cash.
Fourth, you should also consider interest rate fluctuation risks when investing. When rates rise, bond prices fall and the real estate market is also affected. Rather than being obsessed only with short-term profits, it's important to diversify investments from a long-term perspective.
The government and the Bank of Korea also need policy coordination. When fiscal policy and monetary policy go in opposite directions, the effects are offset and only confusion in the market is intensified. To truly revive the economy and stabilize it, the two policies must work harmoniously in the same direction.
Ultimately, the current surge in market interest rates is a warning light revealing structural problems in the Korean economy. If we don't find fundamental solutions rather than short-term remedies, the double burden of high interest rates and economic recession could continue. It's time when not only policy authorities need to make wise decisions, but individuals also need to pay more attention to risk management.
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