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Rate cut may not help ease poor families’ debt burdens
By Korea HeraldPublished : May 13, 2013 - 20:45
A rate cut by South Korea’s central bank may not help ease low-income families’ debt-serving burdens as their debt holdings stood relatively low and income growth remained stagnant, data showed Monday.
In a surprise move, the Bank of Korea on Thursday cut the benchmark seven-day repo rate by a quarter percentage point to 2.5 percent in a bid to support the government’s stimulus drive.
BOK Gov. Kim Choong-soo said in a press conference that the rate reduction would ease debt-serving burdens for low-income families more than high-income households.
But an analysis based on the 2012 report on households’ financial assets and debt might show that the governor’s argument may be not convincing, analysts say.
Due to the rate reduction, the lowest 20 percent income bracket may save a yearly average of 16,000 won ($14.41) in interest-payment costs, but their interest income may decline by an average of 27,000 won annually, according to the analysis.
The calculation was made based on the premise that their savings and financial debt move in tandem with changes in interest rates. The low-income families hold savings worth an average of 10.87 million won and financial debt of 63.2 million won on average, according to the report.
The rate cut would lead the highest 20 percent income bracket to save a yearly average of 220,000 won in interest while their interest income from savings may fall by 375,000 won, indicating that the monetary easing does not seem to improve households’ financial health.
But if an analysis is made only by calculating data on those with financial debt among the lowest 20 percent income bracket, the rate cut could bring such people a profit of around 14,000 won annually.
Analysts said that this means a rate reduction is effective only for some low-income families with high debt, but not for the lowest income group. The report showed that 26.2 percent of the lowest income bracket held financial debt as of 2012.
Usually, a rate cut could aggravate household debt by giving incentives to local households to borrow further, but it also ease burdens for repaying interest.
South Korea’s household debt has been the main bugbear for local policymakers as it could crimp consumer spending, hurting economic growth. The country’s household credit stood at a record 959.4 trillion won as of end-last year. (Yonhap News)
In a surprise move, the Bank of Korea on Thursday cut the benchmark seven-day repo rate by a quarter percentage point to 2.5 percent in a bid to support the government’s stimulus drive.
BOK Gov. Kim Choong-soo said in a press conference that the rate reduction would ease debt-serving burdens for low-income families more than high-income households.
But an analysis based on the 2012 report on households’ financial assets and debt might show that the governor’s argument may be not convincing, analysts say.
Due to the rate reduction, the lowest 20 percent income bracket may save a yearly average of 16,000 won ($14.41) in interest-payment costs, but their interest income may decline by an average of 27,000 won annually, according to the analysis.
The calculation was made based on the premise that their savings and financial debt move in tandem with changes in interest rates. The low-income families hold savings worth an average of 10.87 million won and financial debt of 63.2 million won on average, according to the report.
The rate cut would lead the highest 20 percent income bracket to save a yearly average of 220,000 won in interest while their interest income from savings may fall by 375,000 won, indicating that the monetary easing does not seem to improve households’ financial health.
But if an analysis is made only by calculating data on those with financial debt among the lowest 20 percent income bracket, the rate cut could bring such people a profit of around 14,000 won annually.
Analysts said that this means a rate reduction is effective only for some low-income families with high debt, but not for the lowest income group. The report showed that 26.2 percent of the lowest income bracket held financial debt as of 2012.
Usually, a rate cut could aggravate household debt by giving incentives to local households to borrow further, but it also ease burdens for repaying interest.
South Korea’s household debt has been the main bugbear for local policymakers as it could crimp consumer spending, hurting economic growth. The country’s household credit stood at a record 959.4 trillion won as of end-last year. (Yonhap News)
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Articles by Korea Herald
