"When Interest Rates Rise by 1%p, Borrowers Reduce Consumption by 0.49%"

KCB Sample Data-Based Estimates
Disposable Income Decreases Due to Interest Repayment Burden
Higher Consumption Decline Among Self-Employed and Younger Age Groups

A study found that when interest rates rise by 1 percentage point, borrowers' consumption decreases by 0.49%. This trend is more pronounced among self-employed individuals and younger age groups, indicating the need to closely monitor their consumption capacity and risk of delinquency.

On the 14th, Kim Hyun-yeol, a research fellow at the Korea Institute of Finance (KIF), estimated using KCB sample data that as of the end of 2022, when interest rates increase by 1 percentage point, the total debt service ratio (DSR) of all borrowers rises by 1.94 percentage points, and consumption decreases by 0.49%. These results show that the increase in interest repayment amounts due to rising loan interest rates leads to a reduction in borrowers' consumption. An increase in DSR means a greater burden of principal and interest repayment relative to income.

The impact of rising loan interest rates on consumption was greater for the self-employed and younger age groups. For the self-employed, a 1% increase in interest rates raised the DSR by 2.43 percentage points and reduced consumption by 0.53%, exceeding the average. By age group, although the increase in DSR was not large among younger individuals, their consumption tended to decrease more significantly. This means that even a slight increase in interest costs reduced their consumption capacity. The consumption reduction rates with a 1 percentage point interest rate increase were 0.78% for those aged 24 and under, 0.74% for ages 25?29, and 0.65% for ages 30?39.

As the upward trend in loan interest rates continues, the pressure on consumption decline is expected to grow. The balance-based loan interest rates have been rising continuously since the base rate hike in August 2021 until last month. Last month, the balance-based bank household loan interest rate stood at 5.01%, up 0.06 percentage points from the previous month and 1.76 percentage points from the same period last year. The balance-based COFIX also rose to 3.71% last month, increasing by 0.04 percentage points from the previous month and 2.65 percentage points year-on-year.

Research fellow Kim emphasized, “The burden of interest repayment can act as a downward pressure factor on private consumption,” adding, “Especially, the impact is expected to be significant for the self-employed and younger age groups, so it is necessary to monitor their consumption capacity and repayment ability closely.”

This content was produced with the assistance of AI translation services.