Commercial banks are raising interest rates on their loans following the increase of the benchmark rate last week, heightening the financial burden on households and small firms.

The Bank of Korea unexpectedly raised the seven-day repurchase rate by 25 basis points on Thursday, as Korea grapples with higher inflation stemming from strong economic growth and rising oil, grain and other commodity prices.
The decision is prompting lenders to upwardly adjust borrowing costs on their mortgage and credit loans.

Kookmin Bank plans to raise the range of its key apartment mortgage rates to 4.73-6.03 percent on Monday, up 0.18 percentage point from last week, according to industry officials.

Woori Bank and Shinhan Bank will also plan to increase those rates from last week’s 4.26-5.58 percent to 4.32-5.64 percent and from 4.4-5.8 percent to 4.52~5.92 percent, respectively.

The banks will also push up interest rates on loans guaranteed against housing rental deposit money.

Kookmin and Shinhan will lift the rates by 0.10 percentage point to 5.19-6.49 percent and 0.12 percent point to 5.22~6.72, respectively.

Woori’s key credit loan rates will go up by 0.06 percentage point to 6.07-9.02 percent this week.

The hikes are raising concerns about increased financial burden on debt-ridden households and small and medium-sized enterprises.

Household loans extended by financial firms increased last year amid low borrowing costs and eased rules on mortgage loans.

Household lending handled by local banks and non-bank institutions totaled an outstanding 590.2 trillion won ($529.4 billion) as of the end of November, up 6.6 trillion won from the previous month, according to the Bank of Korea. The November gain marked the largest monthly expansion since a 7 trillion won advance in December 2006.

In November, mortgage loans extended by such financial firms rose by 3.7 trillion won on-month to 353.8 trillion won. The monthly growth hit a 15-month high, it added.

The BOK raised the key interest rate by 0.25 percentage point to 2.75 percent on Thursday, the third increase since the onset of the global financial turmoil.

Experts said Sunday Korea’s consumer prices may grow in the 4-percent range in the first quarter, as rising raw material costs and food prices are putting upward pressure on consumer inflation,.

The central bank forecast the country’s consumer prices to rise 3.5 percent this year, up from 2.9 percent in 2010. The bank’s inflation projection stood at 3.7 percent in the first half of this year.

The BOK said rising raw material costs, including oil prices, and demand-pull inflationary pressure may lead it to revise up its inflation outlook.

“As oil prices are rising faster than expected and demand-pull inflationary pressure is mounting, the first-quarter inflation growth may grow in the 4-percent range,” an official at the BOK said.

If consumer prices rise in the 4-percent range in the current quarter, it would marked the steepest expansion since the fourth quarter of 2008, when they rose 4.5 percent. The central bank aims to keep the median inflation target at 3 percent with a margin of plus or minus 1 percentage point for 2010-2012.

(From news reports)