Rising inflationary pressures are raising concerns that possible interest rate hikes prompted by inflation woes would have a negative impact on the country’s economy, which is now seen to be on a fragile recovery track.

A widening gap between increasing demand and short supply has been pushing up international prices of raw materials, parts and grains. Alarm bells on global inflation began ringing early this year on the prospect of a quick recovery from the economic shock of the coronavirus pandemic due to the vaccine rollout coupled with inundated liquidities in all major economies.

The total amount of money in circulation increased 25 percent in the US last year, with the growth rate ranging from 9 to 11 percent in the eurozone, China and Japan.

Global inflation fears heightened after the US said last week its consumer prices shot up 4.2 percent on-year in April, the steepest in 13 years. The price hike that far exceeded the market expectation of around 3.6 percent has sparked speculation that the US Federal Reserve may move to tighten its easy monetary policy sooner than anticipated to preclude inflation risks. The Fed’s decision to raise its key interest rate would put pressure on South Korea to follow suit.

A wider gap between the two countries’ interest rates could prompt capital outflows from South Korea, which has a relatively small, open economy.

The Bank of Korea froze its benchmark rate at a record low of 0.5 percent in April amid a resurgence in COVID-19 cases. Minutes from the latest meeting of its policymakers showed they judged it was too early to discuss rolling back accommodative monetary measures.

Still, they voiced concerns about an uptick in domestic inflation. The country saw its consumer prices rise 2.3 percent in April from a year earlier, the highest in nearly four years.

Possible rate increases would carry significant risks for Asia’s fourth-largest economy, which has been saddled with mounting household debt and a growing number of loss-making companies.

Korea’s household debt climbed to a record high of 1,726 trillion won ($1.52 trillion) at the end of last year, up 7.9 percent from a year earlier. The sum continues to rise this year, with household loans extended by local banks growing by 16.1 trillion won in April, recording the largest monthly increase since the Bank of Korea began compiling related data in 2004.

Rate hikes would increase household debt service payments with inflation resulting in a decrease in actual incomes earned by working-class families.

Increased borrowing costs would also push many heavily-indebted companies further into the corner. Last year, 18 of the country’s 100 major firms were unable to pay interests with their operating profits for the third consecutive year. The aggregate debt owed by companies listed on the Kospi and Kosdaq markets, the main and tech-heavy bourses here, increased 6.09 percent and 16.63 percent, respectively, in 2020.

Corporate profitability could worsen as many manufacturing firms have difficulties immediately reflecting soaring prices of raw materials into the prices of their products.

The government needs to accelerate corporate restructuring and put the rapid increase in household debt under control before a rate hike can no longer be delayed amid heightened inflation pressures.

What is worrying is that political demands for fiscal expansion are set to grow in the run-up to the next presidential election slated for March. It would further fuel inflation if government spending increases recklessly to pander to populist pledges by political parties, particularly the ruling Democratic Party of Korea.

Government officials and politicians should be more concerned about the suffering that steep inflation would cause for indebted households and faltering companies.

Individual investors who have borrowed money to invest in stocks, real estate and cryptocurrencies also need to be cautioned against the possibility of asset bubbles bursting when inflationary pressures make tightening monetary policy inevitable. Financial authorities should strengthen the monitoring of asset market movements and issue timely warnings and guidelines to prepare for a sudden shock.

Heightened inflationary pressures also heighten the need for the government to curb a surge in national debt to preclude increased debt-servicing costs from further exacerbating fiscal deficits. Korea saw its national debt grow by the largest-ever amount of 123.7 trillion won on-year to a record 846.9 trillion won last year.