SEOUL, Dec. 29 (Korea Bizwire) — A country with high household debt that raises key interest rates can be affected by a drop in total demand and consumption, a report said Friday.
“We’ve found that key interest rate hikes have a great impact on the economic adjustment in a country which has a high degree of household debt,” the report by the Bank of Korea (BOK) showed. The assessment was based on analyzing the impact of rate hikes on the economies of 28 members of the Organization of Economic Cooperation and Development (OECD) between 1984 and 2015.
The findings said that heavily indebted households tend to reduce spending to pay higher interest outlays.
The report comes as the central bank raised the base rate by a quarter percentage point to 1.5 percent on Dec. 1 for the first time since June 2011, citing clear signs of economic recovery and low inflation pressure.
In raising the rates, the BOK cited the need to control mounting household debt which surpassed 1,400 trillion won (US$1.3 trillion) in September.
The report, however, did not expect the latest rate hike to greatly dampen domestic consumption immediately, saying it’s not clear at the moment if South Korea’s household debt should be categorized as higher than those in the surveyed economies.