Severe Consumption Slump Similar to the Card Crisis 21 Years Ago

Gradual Cut in Bank of Korea's Base Rate Expected Due to Weak Consumption
Severe Consumption Slump Also Seen During 2003 Card Crisis

On the 14th, when dining-out prices continued to soar early in the year, a restaurant's menu board was posted on Myeongdong Street in Seoul. According to the Consumer Price Trends by the Statistics Korea, the dining-out price increase rate last year rose by 6% compared to the previous year, marking the highest figure in 30 years. Photo by Jo Yongjun jun21@

An analysis has emerged that South Korea's monetary policy environment this year is similar to that during the 2003 credit card crisis, which occurred 21 years ago. At that time, consumption sharply declined due to the credit card crisis, prompting the Bank of Korea to cut interest rates. The current economic situation, characterized by high interest rates and high inflation, is unfolding in a manner similar to that period.

According to the February Financial Monetary Committee result analysis report by Hana Financial Management Research Institute on the 26th, South Korea has experienced a total of six interest rate cut cycles since the introduction of interest rate-centered monetary policy in 1998. The current base rate cut cycle was evaluated as most similar to the 2003 credit card crisis period.

The 2003 credit card crisis was an event where indiscriminate issuance of credit cards led credit card companies to the brink of bankruptcy, and a large number of defaulters were produced in society. The government relaxed credit card regulations to stimulate consumption and boost the economy, which led to indiscriminate use of credit cards even by college students and young workers who lacked the ability to repay debts. As a result, consumption at the time was extremely depressed, and the economic growth rate plummeted. Ultimately, the government stepped in with comprehensive measures, and the Bank of Korea actively intervened by lowering the base interest rate to resolve the issue.

With high interest rates and high inflation persisting, the current consumption slump is as severe as it was then. According to Statistics Korea, the annual retail sales index last year decreased by 1.4% compared to the year before, marking the largest decline since 2003 (-3.2%) when the credit card crisis occurred. The retail sales index fell for two consecutive years following 2022 (-0.3%), which is the first time since related statistics began in 1995.

The Bank of Korea lowered its forecast for private consumption growth this year from 1.9% to 1.6% in the revised economic outlook announced on the 22nd. This projection is below last year's private consumption growth rate of 1.8%. The Korea Development Institute (KDI) also predicted a 1.6% private consumption growth rate for this year. The Bank of Korea explained, "Due to the impact of high inflation and high interest rates, a sluggish trend centered on goods consumption continues, and the recovery momentum has weakened more than initially expected."

The research institute anticipated that, considering the domestic economic downturn caused by delayed domestic demand recovery, the Bank of Korea will gradually lower the current base interest rate of around 3.5% to 2.5% over the next 15 months. It is expected that market interest rates will decline ahead of the Bank of Korea's base rate cuts. The upper limit of the 3-year government bond yield, currently around 3.5%, is predicted to fall to 3.25% in the fourth quarter.

However, until the actual monetary policy shift occurs, it is expected that as the decline in market interest rates expands, the burden on the speed and extent of future rate cuts will increase, strengthening upward pressure. Conversely, when market interest rates rise, downward pressure will be highlighted due to bets on rate cuts within the year, resulting in a repeated box-range market.

Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, stated, "If the disinflation trend continues and expectations for a monetary policy direction shift within the year remain valid, it is likely that market interest rates will remain below the base rate for an extended period and gradually lower their upper limit."

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