Interest rate cuts have limited economic impact: BOK

Seoul, Nov 11 (IANS) Interest rate reductions would have only a limited effect in stimulating the economy when expectations for housing price increases remain high, the central bank here said on Tuesday.

According to a report by the Bank of Korea (BOK) on consumers' "diagnostic expectations" about home prices, many consumers have expected housing prices to rise even as the market shows signs of decline, reports Yonhap news agency.

If interest rates are lowered under such circumstances, excessive expectations for rising housing prices tend to build up, driving home prices higher while dampening the positive impact on economic growth.

Specifically, under the assumption of diagnostic expectations, housing prices were found to rise about 56 percent more two years after a 0.25 percentage point rate cut compared with the case of "rational expectations." In contrast, gross domestic product (GDP), investment and consumption increased 8-10 percent less.

"To mitigate the negative effects of diagnostic expectations, policymakers should implement consistent measures to prevent people from developing excessive expectations for rising housing prices," the report read.

"Strong macroprudential policies are also needed during periods of monetary easing to support economic growth when home prices are on the rise," it added.

Meanwhile, more than one out of four households in South Korea expect their financial conditions to improve next year, with some 20 percent of households having seen an increase in income this year, a government survey showed on Tuesday.

In the biennial survey conducted by the Ministry of Data and Statistics, 27 percent of households polled said they expect improved financial conditions in 2026 compared with this year, up 1.3 percentage points from two years ago. The survey was conducted on the heads of households aged 19 or older.

Fifty-four percent said their financial situation will remain unchanged, while 19.1 percent said it will get worse.

Asked about the financial situation for 2025, 21.5 percent of respondents said their household income increased from a year earlier, while 19 percent said it has decreased. The remaining 59.5 percent said their income was the same.

Some 15.6 percent of the households also said their income was more than sufficient compared with minimum monthly living expenses, up 1.9 percentage points from two years earlier.

—IANS

na/