Tue, Apr 07, 2015 - Page 15 News List

Bank of Korea in a bind as older people cling to savings

Bloomberg

South Koreans are getting older and spending less, making it more difficult for the central bank to stoke spending and price gains to keep the nation’s tiger economy powering along.

Cho Woang-lae, a retired engineer living in Seoul, is like many of the 7.6 million South Koreans who are 60 or over and see the Bank of Korea’s recent interest-rate cuts as harmful rather than helpful.

Conventional economic wisdom does not apply to Cho. Record-low rates have not encouraged the 64-year-old to borrow and spend or invest. For him it means lower returns on the 300 million won (US$276,000) deposit that helps fund his retirement.

“People say I should invest in stocks, but I’m no good at that, and a bank deposit is what I prefer,” Cho said. “I feel I need to prepare for a low interest rate era. It makes me think twice before buying something or eating out at a restaurant.”

The Bank of Korea has cut the benchmark interest rate three times since August last year, to an unprecedented 1.75 percent last month. Still, there are few signs of strength in consumption and the household savings rate rose to the highest level in 10 years last year.

“Changes in South Korea’s demographics are the key reason why rate cuts aren’t boosting consumption,” said Kim Seong-tae, a Sejong-based research fellow for Korea Development Institute. “If you think you’re going to live longer and are unsure of what’s going to happen in the future, there’s little incentive to spend more and save less, despite the low rates.”

Bank of Korea Governor Lee Ju-yeol is aware of the dilemma. He has told staff at the bank it’s clear “structural factors,” including rapid aging have changed the way that monetary policy affects the economy.

He has also said to reporters that the biggest hurdle to economic recovery in South Korea is weak domestic demand, rather than problems with exports.

To get a handle on the issues, economists are studying everything from the spending patterns of retirees like Cho to their power at the ballot box and the impact they have on technical indicators like the labor force participation rate and nominal wages.

The ratio of people aged 65 or over is projected to rise to 32 percent by 2040, from about 13 percent now, data from Statistics Korea show.

Park Jong-kyu, a researcher for Korea Institute of Finance in Seoul, sees rate cuts at best affecting markets for property and stocks, and doing little to boost consumption.

“With an aging population, we’ve got fewer working-age people and an increasing number of baby boomers retiring, making the total amount of income less than what it used to be,” Park said. “It might be impossible to raise the level of consumption to match the past, although this doesn’t mean we should give up policy efforts.”

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