Rate cuts not cutting it in Asia

Monetary policy easing is unlikely to deliver the economic boost policymakers in Asia are hoping for. Despite a wave of rate cuts across the region, household credit demand remains subdued. This is driven by structural rather than cyclical reasons, signalling a new reality for policymakers and markets. The solution likely lies in addressing debt, income growth, and confidence.

Central banks in Asia have acted decisively. India, Indonesia and the Philippines have cut policy rates by more than a percentage point. Malaysia has eased, though more modestly. Yet, unlike previous cycles, these moves have not sparked a broad-based increase in household borrowing. In fact, credit growth has softened in several of Asia’s largest economies since the easing began.

The core issue is debt. Asian households have taken on higher levels of debt relative to incomes over the past decade. In countries like Malaysia, South Korea and Thailand, household debt now exceeds 60 per cent of gross domestic product – levels the Bank for International Settlements considers critical for long-term economic health. Even in economies where debt ratios are lower, such as India and Indonesia, the burden is much heavier than it was 10 years ago.

The debt overhang has likely changed the way households respond to lower interest rates. When debt is high, households are less willing to borrow more, even if loans become cheaper. In China, Malaysia and Thailand, households now use a higher share of income to service debt compared to pre-pandemic levels, making new borrowing less attractive.

The story does not revolve solely around debt. Most Asian economies have experienced relatively muted income growth, especially since the post-pandemic rebound faded. Consumer expectations about future earnings have stagnated or declined in many economies. High youth unemployment and slow recovery in key sectors like tourism have dampened confidence in China and Thailand. Even in India, where consumer sentiment has lately improved, household financial savings remain below pre-pandemic levels.

Wealth effects have lost strength. In Asia, housing constitutes a large share of household wealth compared to the United States. When property prices rise, homeowners feel richer and tend to increase consumption. But apart from Singapore and – more recently – South Korea, property price growth has slowed notably. As a result, households might not want to increase spending or borrowing significantly.

The incomplete transmission of policy rates to lending rates is another challenge. In countries such as Malaysia, lending rates have fallen in line with policy rates because it is statutorily required. But in most other economies, the passthrough has been weak.

Recently some banks in India have raised mortgage rates despite the central bank’s easing likely continuing. This is significant because most household borrowing in Asia occurs on floating rates, unlike the fixed-rate mortgages common in the euro area and the United States. When lending rates do not fall, the intended stimulus from rate cuts does not reach households.

Banks are also facing constraints. Loan-to-deposit ratios remain high, partly due to sluggish deposit growth. Weaker household savings in the post-pandemic period have contributed to this. With banks less able or willing to lower lending rates, real (inflation-adjusted) borrowing costs remain elevated in most economies. Only Singapore and – to a lesser extent – Thailand have seen real lending rates ease since the pandemic.

Given these headwinds, the current round of monetary easing will likely do little more than contain debt servicing costs. It will not drive a new wave of household borrowing or spending. This marks a distinct shift from previous cycles when lower rates reliably boosted credit and consumption.

However, there are crucial differences in economies across Asia. Singaporean households have strengthened their balance sheets by reducing liabilities and increasing financial assets. The ratio of household financial assets to liabilities in Singapore now matches – or even exceeds – that of many advanced economies. But the increased exposure to housing in Singapore is largely due to higher home prices than more borrowing. As a result, Singaporean households are well placed to take on new credit should they choose to do so.

South Korea also offers some hope for household credit recovery. Despite high household debt, a recovery in borrowing and spending is possible with strong savings, low unemployment and improving consumer confidence. If lending rules are not tightened further, credit growth could pick up. However, policymakers remain cautious, with the Bank of Korea recently tightening loan limits on home purchases in the Greater Seoul area.

Elsewhere in the region, the outlook appears less encouraging. In India, Indonesia and the Philippines, household credit demand will likely be subdued due to high debt, weak income growth and limited wealth effects. China and Thailand face even more pronounced challenges, as consumer confidence and income expectations still lag.

Policymakers should take a clear lesson from this situation – monetary easing alone cannot overcome the constraints facing Asian households. Only by addressing high debt levels, boosting income growth, and restoring confidence can economies revive credit demand and support economic growth on a sustained basis. Until then, rate cuts will continue to have a limited impact.

Sanjay Mathur is Chief Economist, Southeast Asia and India, & Dhiraj Nim is an Economist at ANZ