[Edaily Reporter Jang Young-eun ] The Bank of Korea, which had been aggressively tightening monetary policy with consecutive rate hikes in July and August, has shifted into neutral for the time being. While emphasizing the need to curb rising housing prices in the Seoul metropolitan area to prevent household debt from expanding, the bank also highlighted concerns about the risk of defaults in vulnerable sectors, such as the self-employed and struggling businesses. This is interpreted as a sign that the bank intends to weigh the timing of the next rate hike while assessing both the positive and negative impacts of the rate increases.

◇ Medium- to Long-Term Financial Vulnerability Reaches Long-Term Average… “Expected to Rise Further”

In its review of the financial stability situation (as of September 2026) released on the 22nd, the Bank of Korea (BOK) reported that the Financial Vulnerability Index (FVI), which measures medium- to long-term financial vulnerability, stood at 46.5 at the end of the second quarter of 2026, reaching the long-term average level, and projected that it would continue to rise in the third quarter. Typically, during periods of interest rate hikes, the FVI declines with a lag of about one quarter; however, the Bank of Korea’s analysis suggests that if housing prices in the Seoul metropolitan area continue their current upward trend despite a rate hike in the third quarter, the FVI could rise further in the fourth quarter.

This explains why BOK Governor Shin Hyun-song, in an unusual move, cited the FVI figure during a press briefing last month, emphasizing that “preemptive action is necessary to prevent a small problem from becoming a major one.” The decision to implement these unusual consecutive rate hikes was based on the assessment that stabilizing inflation expectations early through preemptive rate hikes, while curbing the rise in housing prices in the Seoul metropolitan area and the expansion of private-sector leverage, would ultimately reduce the burden on the real economy.

The Bank of Korea also noted that while the household debt-to-GDP ratio has fallen rapidly thanks to the steep growth in nominal gross domestic product (GDP), the downward trend in the debt ratio must continue. The household debt-to-GDP ratio is expected to decline from 85.3% at the end of the first quarter of this year to approximately 81% by the end of the second quarter. Jang Jeong-su, Deputy Governor of the Bank of Korea, said, “By the end of the year, the household debt-to-GDP ratio could reach the mid-to-high 70s,” but emphasized, “While the ‘denominator effect’ resulting from the sharp rise in GDP has played a significant role, the policy stance on managing household debt must be maintained, considering factors such as high expectations for housing price increases and disparities in income growth across sectors.”

◇ The Impact of Interest Rate Hikes Hits ‘Weak Links’ First and Harder

The problem is that the ripple effects of interest rate hikes hit vulnerable groups and small and medium-sized enterprises (SMEs)—which lack the capacity to absorb shocks—first and hardest, with a time lag.

According to the Bank of Korea’s analysis, while it takes about 15 months for a benchmark interest rate hike to fully affect delinquency rates at commercial banks, the response is much faster for vulnerable household borrowers and small and medium-sized enterprises (SMEs), with delinquency rates rising in about 9 months. Furthermore, it is estimated that 47.5%—nearly half—of borrowers in the bottom 20% income bracket will see their net interest burden increase if interest rates rise. This proportion is significantly higher than that of households as a whole (28.6%).

As of the end of the second quarter of this year, the delinquency rate for vulnerable household borrowers stood at 10.39%, more than ten times the delinquency rate for all household loans (0.98%) and higher than during previous periods of interest rate hikes. The delinquency rate for vulnerable self-employed individuals soared to 12.71%.

In the corporate sector as well, the number of companies reaching the limits of their ability to pay interest has increased. The proportion of distressed companies (based on the number of firms)—those with an interest coverage ratio below 1 for three consecutive years—stood at 19.1% at the end of last year. This means that one in five companies cannot even cover its total interest expenses with operating profit. The share of loans extended to distressed firms also rebounded to 21.2% as of the end of last year, with small and medium-sized enterprises (SMEs) accounting for 28.9% of this total—meaning that roughly 3 won out of every 10 won in loans from the financial sector is tied up in distressed firms.

Although a high economic growth rate in the 3% range is expected this year, driven by strong exports and a booming semiconductor market, the deepening “polarization”—where the gap in income improvement across sectors is widening significantly—is also clearly reflected in concerns about loan defaults. In this situation, the fact that rapid interest rate hikes could trigger defaults among vulnerable borrowers and distressed firms whose financial conditions have deteriorated poses a significant policy burden for the Bank of Korea.

◇ BOK Weighs ‘Timely Action’ Amid Policy Coordination with the Government

The BOK’s future monetary policy operations are expected to focus on finding the “right timing” by comprehensively considering price stability, concerns over defaults among vulnerable groups, economic polarization, and coordination with government policies.

Even within the Monetary Policy Committee, there are calls for micro-level coordination with fiscal and financial policies to mitigate shocks to vulnerable sectors, while maintaining a macroprudential policy stance aimed at preventing the accumulation of financial imbalances. This is because interest rate policy affects all sectors of the economy indiscriminately, making it necessary to supplement it with government policies.

While some speculate that the Bank of Korea might implement an additional rate hike in October in response to the U.S. Federal Reserve’s shift toward tightening, most experts predict that the central bank will assess the impact of the rate hike and evaluate the need for a further increase around November of this year.