The Bank of Korea, or BOK, issued a report warning that the country's financial imbalances remain at a high level amid rising home prices and interest rates. The financial vulnerability index, which measures medium- to long-term imbalances, rose to 46.5 in the second quarter of 2026 from 37.6 in the first quarter of 2024, driven by the expansion of household credit and continuously rising home prices in Seoul and surrounding areas. Meanwhile, the financial stress index, which measures short-term imbalances, edged up to 19.3 in July and 19.5 in August, still within the watch range of 12 to 24. The BOK said that although strong semiconductor exports are supporting economic growth, higher interest rates could affect the debt repayment capacity of vulnerable borrowers, after it raised rates in both July and August, bringing the policy rate to 3.00%. The ratio of household debt to GDP fell to 85.3% at the end of March from 88.1% in the previous three months, but the BOK explained that the decline was due to rapid GDP growth from surging chip exports rather than an actual reduction in debt, and called for continued efforts to reduce debt levels in order to cope with changes in the global economy, including the possibility that investment in artificial intelligence could slow, as well as the monetary policy of the US central bank, volatility in long-term interest rates worldwide, and geopolitical risks in the Middle East, which could exacerbate volatility in South Korea's financial and foreign exchange markets.
BOK raised rates in July and August to 3.00% and warns of financial imbalances, pushing South Korean 10Y bond yields higher (bond prices lower).
