[Editorial] Global Tightening Is Accelerating; Preemptive Steps Are Needed to Stabilize Markets

Following the European Central Bank (ECB), the Bank of Japan (BOJ) has also recently raised its benchmark rate to the 1% range, the highest level in 31 years. The Reserve Bank of Australia (RBA) left rates unchanged, but signaled the possibility of an increase. As tightening gathers pace among major economies, Korea is increasingly likely to join the rate-hike cycle. Market rates are also rising as they price in further increases. The government and markets must move quickly to prepare for the impact of tighter policy while preserving growth momentum.
Market attention is focused on the first Federal Open Market Committee (FOMC) meeting since Kevin Warsh took office as chair of the Federal Reserve System (the Fed). The prevailing view was that the Fed would maintain a hawkish stance, given inflationary pressure from the war in the Middle East. The benchmark rate is expected to be left unchanged at this meeting, but there has been talk that the Fed could send a firm signal about the future rate path. Still, some analysts say the mood could shift after the United States and Iran recently reached an agreement to end the war.
Citigroup said that after the announcement of a memorandum of understanding (MOU) to end the war in the Middle East, falling oil prices have improved the conditions for rate cuts. By contrast, Citadel Securities argued that inflationary pressure is broader and more persistent than expected, raising the possibility of a rate hike as early as September. With Wall Street divided in its outlook, attention is turning to Warsh's first press conference on the 17th, local time. Whatever message the Fed delivers, one thing is clear: the global economy is moving away from the era of low rates after a period of high rates and high inflation, and is searching for a new equilibrium.
If the Fed confirms that it will keep its tightening stance as expected, the pace of rate hikes in Korea and other major economies could accelerate. Shin Hyun-song, governor of the Bank of Korea, recently made his hawkish position clear by saying that the benchmark rate would be raised 'without delay' to stabilize prices. Growth, inflation, and financial stability all support the need for higher rates, he said. In the market, there is a growing sense that a rate hike on the 16th of next month is all but certain. Even with the United States-Iran agreement, uncertainty remains, and inflationary pressure could continue as supply-chain normalization is delayed.
As global tightening spreads, the government and markets must prepare thoroughly. Higher rates can increase the debt burden on companies and households, while dampening consumption and investment. The risk of default among marginal firms could rise, and volatility in asset markets such as real estate, stocks, and bonds may also widen. Emerging economies, in particular, could face a double burden when U.S. rates rise: a stronger dollar that drives up exchange rates and capital outflows. There are also concerns about stagflation, where inflation remains stubborn while the economy slows. Korea should not underestimate the shock of tightening, especially after industrial activity data for April showed declines in production, consumption, and investment.
Fortunately, the Korean economy is continuing to grow, supported by strong semiconductor exports. Tax revenue, investment, and income are also improving, suggesting that the economy has enough resilience to withstand tighter policy. Rate hikes could also help stabilize prices and cool signs of overheating in the Seoul metropolitan area's real estate market.
Even so, the burden of interest payments will grow further for low-income households, small self-employed business owners, and small and medium-sized enterprises already struggling with debt. Unpaid debt among the self-employed has risen 8% this year alone, reaching 38 trillion won. The government should prepare targeted support measures to minimize the shock. It is necessary to acknowledge the inevitability of tightening, while ensuring that its burden does not fall disproportionately on vulnerable groups.