Recent data has revealed that individuals in their 30s and 40s who have taken on debt to purchase homes are the ones who have most drastically cut back on their spending following the rise in interest rates. (Image courtesy of Yonhap)
SEOUL, Feb. 26 (Korea Bizwire) – Amidst the ongoing economic challenges marked by high inflation and interest rates, recent data has revealed that individuals in their 30s and 40s who have taken on debt to purchase homes are the ones who have most drastically cut back on their spending following the rise in interest rates.
A report from the Bank of Korea released on February 25 evaluates the inter-temporal substitution effect, where households increase their savings and reduce current consumption in response to rising interest rates, indicating a widespread trend of reduced spending across various goods and household characteristics. Notably, the household net saving rate has risen to levels higher than the past average.
The Bank of Korea took into account the varying financial impacts of interest rate hikes on different households by measuring each household’s interest rate exposure. Based on this, households were categorized into different segments: the bottom three quintiles as the interest rate hike loss group, the fifth quintile as the vulnerable group, and the top two quintiles as the interest rate hike gain group.
Upon examining household consumption changes post-pandemic according to the interest rate exposure classification, the Bank of Korea found that the interest rate hike loss group experienced the most sluggish recovery in consumption.
The report highlights that, excluding income factors, the consumption growth rate in 2022 showed that the decrease in consumption among the vulnerable group was relatively mild compared to the interest rate hike loss group, while the interest rate hike gain group saw a slight increase in consumption.
Jung Dong-jae, the head of the Bank of Korea’s Macroeconomic Analysis Team, anticipates that household consumption will receive a positive boost as interest rates decrease with the stabilization of prices. However, he cautioned that the significant increase in price levels due to past inflation could potentially slow down the pace of consumption recovery.
M. H. Lee (mhlee@koreabizwire.com)
