[비즈한국] The Bank of Korea (BOK) decided to freeze its base interest rate at the first Monetary Policy Board meeting of the year. The BOK's decision is interpreted as a move to avoid a potential further rise in the exchange rate, fearing that a rate cut could weaken the won. The decision also took into account the persistently high level of household debt in Korea. According to the Bank for International Settlements (BIS), Korea's household debt is the fourth highest among 44 major economies.
However, it is difficult to focus solely on household debt, as the situation for Korean households—particularly those in low-income brackets—is rapidly deteriorating. Economic conditions for households have worsened even further in the aftermath of the martial law declaration. Consequently, analysts suggest the BOK may have no choice but to lower the base rate at the next Monetary Policy Board meeting scheduled for February 25.
The BOK decided to hold the base rate at 3.00% during its first meeting on January 16. With the won-dollar exchange rate hovering in the mid-1,400 range, policymakers considered that cutting the rate for the third consecutive time could widen the interest rate gap with the U.S., potentially triggering further currency depreciation.
The fact that Korea’s household debt levels remain unfavorable compared to other nations also played a role. According to the BIS, Korea's household debt-to-GDP ratio stood at 91.0% as of the end of June last year. While this is a 3.5 percentage point decrease from the 94.5% recorded a year earlier in June 2023, the decline is modest, occurring as the economy transitioned from the low-interest-rate environment of the COVID-19 pandemic to a prolonged period of high interest rates.
Nevertheless, this debt level remains high compared to other major countries. In the U.S., the household debt-to-GDP ratio was 70.7%, while the U.K. stood at 77.5%. In neighboring Japan, the ratio was just 65.4%. Italy, which has an economy similar in size to Korea, saw a debt ratio of 36.6%. Even in China, where local government debt has recently been cited as a cause for serious economic concern, the household debt ratio was 62.1%, lower than Korea’s. Among 44 major countries, only three—Switzerland (125.7%), Australia (111.5%), and Canada (101.8%)—had higher levels of household debt than Korea.
The BOK froze the rate in light of these exchange rate and debt considerations. However, given the current financial struggles of low-income families, maintaining this freeze indefinitely is becoming difficult. According to Statistics Korea, the average monthly income for urban households in Korea was 4,720,960 won in the third quarter of last year, a 121,597 won (2.6%) increase from a year prior (4,599,363 won). Household spending rose by 54,226 won (1.5%) from 3,528,597 won to 3,582,824 won over the same period, resulting in a surplus of 1,138,136 won.
While Korean households overall generated an average surplus of over 1 million won per month, the situation worsened specifically for the lowest 20% income bracket (first quintile). The average monthly income for these households in the third quarter of last year was 1,078,218 won, an increase of only 28,089 won (2.7%) from the previous year (1,050,129 won). Conversely, their spending rose from 1,304,957 won to 1,357,240 won (a 4.0% increase) during the same period. As a result, first-quintile households faced an average monthly deficit of 279,022 won in the third quarter, which is wider than the 254,828 won deficit recorded a year earlier. The proportion of households in deficit also increased; for the first quintile, 33.1% were in deficit as of the third quarter of last year, up 4.6 percentage points from a year prior (28.6%). This means one in three low-income households is currently in the red.
These conditions have worsened further following the martial law situation. According to the BOK, the Consumer Survey Index (CSI) for "current living standards," which compares life now to six months ago, remained at 87 in January, mirroring December of last year. This is the lowest figure since November 2023 (87). The index failed to recover after falling 4 points from 91 in November of last year, indicating that the aftereffects of the December 3rd martial law declaration are persisting.
A CSI reading below the baseline of 100 indicates that more consumers feel their living standards have worsened compared to six months prior. Notably, for low-income households with monthly incomes under 1 million won, the January CSI for current living standards plummeted 5 points from December (81) to 76.