The average borrowing costs for household loans extended by deposit banks in South Korea reached an all-time high in 27 months in May after the recent interest rate hikes by the U.S. Federal Reserve, adding financial burden on vulnerable borrowers including lower income households, central bank data showed on Thursday.

According to data on interest rate trend by the Bank of Korea on Thursday, the average interest rate on fresh bank loans was 3.45 percent in May, up 0.03 percentage point from a month earlier. The increase comes after the rate fell from 3.48 percent in March to 3.42 percent in April.

The average interest rate on household loans, in particular, came to 3.47 percent in May, up 0.06 percentage point from April, reaching the highest level in 27 months since 3.48 percent in February, 2015. The rate is 0.31 percentage point higher compared to 3.16 percent a year ago.

Market analysts note that domestic market rates for mid- to long-term deposit products have been ascending on growing expectations that the United States Federal Reserve will continue to raise its base rates. The Fed raised rates already twice this year, including earlier this month, and Fed Chair Janet Yellen said the Fed needs to keep raising rates to prevent inflation from overshooting.

Concerns are looming that the steady rise in interest rates would place financial burden on households, in particular, low-income households that have heavily borrowed money taking advantage of low interest rates in the last few years and in return would restrict consumer spending.

Of household loans, the interest rate on mortgage-backed loans came to 3.26 percent in May, up 0.05 percentage point from a month earlier, reaching an all-time high in 28 months after 3.34 percent in January, 2015. The interest rates on collective loans was 3.15 percent in May, up 0.09 percentage point from April, while guaranteed loans 3.29 percent, up 0.14 percentage point over the same period.

By Chung Seok-woo

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