The Bank of Korea sounded the alarm on possible risks from the country’s intensifying financial imbalances in a report released earlier this week.

The central bank called for vigilance against a steep rise in debts owed by households and companies, and bloated asset prices amid excess liquidity floated to help contain the economic fallout from the prolonged pandemic crisis.

The report noted that the vulnerability of the country’s financial system had worsened to its gravest level since the aftermath of the 2008 global financial crisis. It warned that South Korea’s annual growth rate could fall below minus 0.75 percent a year from now if external shocks were to aggravate the pronounced financial imbalances.

It is rare for the central bank to issue such a strong warning. It usually exercises restraint, avoiding direct language that could have an impact on the financial market. The BOK’s warning can be understood as reflecting its policymakers’ sense of urgency about the growing risks facing the country’s economy, which have been masked by expanded fiscal spending and an improvement in exports.

Interest rate hikes, which seem to have been made inevitable by rising inflationary pressure amid the faster-than-expected economic recovery, could burst the asset bubble as well as increasing financial burdens on households and corporations. This could rattle the economy as a whole.

Korea’s consumer prices and producer prices increased 2.6 percent and 6.9 percent, respectively, in May from a year earlier. Both figures are the highest in nearly a decade.

Lee Ju-yeol, the BOK governor, told reporters Thursday that the central bank was ready to raise its benchmark rate from the current record low of 0.5 percent “within this year” amid the economy’s robust recovery from the coronavirus pandemic.

Since last month, he has hinted at the need to exit from pandemic-era monetary easing in an orderly manner starting at an appropriate time if the economic recovery remains solid. Thursday’s remarks marked the first time he mentioned the specific timing of a rate hike.

He noted that worsening financial imbalances made it all the more necessary to adjust monetary policy.

Some market watchers predict that the BOK will conduct its first post-pandemic rate hike as early as October, before the US Federal Reserve raises its key policy rate, which has remained within the range of 0-0.25 percent since March 2020 but might increase next year.

All economic actors now need to prepare for the inevitability of rate hikes, taking precautions to minimize their impact.

As of the end of March, the outstanding debt of Korea’s households reached 1,765 trillion won ($1.55 trillion), up 150 trillion won or 9.5 percent from a year earlier, according to the BOK report. Households’ debt-to-disposable income ratio rose 11.4 percent over the cited period to 171.5 percent. An additional 1 percent rise in interest rates is estimated to increase debt-servicing burdens on households by about 12 trillion won a year.

A collapse in bloated asset prices would force many indebted households to default on debt repayments, destabilizing the country’s financial system.

Korea’s ratio of house prices to annual household income rose 13 percent last year, the sharpest increase among member states of the Organization for Economic Cooperation and Development. The country’s stock prices have climbed nearly 50 percent since early last year, the highest figure among major economies.

Korean companies’ total outstanding debt stood at 1,402 trillion won as of the end of March, up 14.1 percent from a year earlier. In 2020, 1 in 3 local firms were unable to cover interest payments with their operating profit.

The government should be no exception in preparing for possible risks from growing financial imbalances.

President Moon Jae-in’s administration and the ruling Democratic Party of Korea are planning to draw up a second supplementary budget for this year, which is worth up to 35 trillion won. The measure, which critics say is designed to woo voter support by providing relief aid to all people in the run-up to next year’s presidential election, is out of step with the move to normalize monetary easing.

Fiscal policymakers say the envisioned extra budget will be funded mostly by excess tax revenues, which are projected to surpass 30 trillion won this year. But a large part of the excess revenues should be used to reduce the national debt and secure fiscal room to cope with possible shocks to the economy down the road.