A 0.25 percentage point increase in South Korea's base rate would raise annual interest costs for households and businesses by approximately 7 trillion won ($5.2 billion), the Bank of Korea said in its Financial Stability Report published on the 22nd. Households would bear about 3.3 trillion won ($2.4 billion) of the increase and businesses about 3.7 trillion won ($2.7 billion), according to Lim Kwang-gyu, Director General of the Financial Stability Department. The report found that lending rates based on outstanding balances respond most strongly roughly five months after a rate hike, while bank delinquency rates peak after about 15 months. Vulnerable sectors with weak repayment capacity experience their largest delinquency response around nine months after a hike. The Financial Vulnerability Index (FVI), a gauge of financial-system fragility, rose for nine consecutive quarters from 37.6 in the first quarter of 2024 to 46.5 in the second quarter of this year, mainly because of asset prices including housing. Jang Jeong-su, Deputy Governor, said the FVI had reached its long-term average in the second quarter and was estimated to keep rising into the third quarter, although consecutive rate hikes in July and August and government real estate measures could constrain further increases. The Bank of Korea's analysis of previous tightening cycles found that, eight quarters after a base-rate increase, the credit index fell 1.3 points and the asset-price index declined 4.5 points. Household resilience has improved, with variable-rate loans falling to 56.1% at the end of June this year from 68.4% at the end of July 2021 and vulnerable borrowers remaining at about 6-7%. Businesses face greater strain: marginal companies, those with interest coverage ratios below 1, increased from 17.1% in the fourth quarter of 2024 to 19.1% in the fourth quarter of last year. The central bank warned that rising delinquencies could worsen credit and refinancing conditions, creating a potential cycle of further defaults, and called for monetary, macroprudential and fiscal policies to operate in a complementary manner. Lending rates rose from 4.31% in May to 4.34% in June and 4.37% in July.