Economic Buzz: Lower-Income households could be disproportionately affected by higher interest rates, notes IMF's global financial stability report

Household debt burden has stayed moderate even though global interest rates have risen, IMF noted in its October release of global financial stability report. On the liability side, household debt-service ratios have broadly improved in recent quarters across countries and remain appreciably lower than the peak levels reached after central banks across the world began to hike interest rates in 2022. Countries with more floating-rate mortgages tend to have higher debt-service ratios and are more sensitive to interest rate resets. Meanwhile, household assets have been boosted by a strong equity market and elevated house prices.

Globally, households? equity and real estate holdings account for roughly 20 and 40 percent of their assets, respectively, or 1.2 and 2.5 times global GDP. With a moderate debt burden and high overall asset holdings, households are unlikely to be a source of systemic concern. That said, a correction in housing or asset prices could erode household wealth and curb consumption, with potentially meaningful macroeconomic effects. Lower-income households could be disproportionately affected given their limited liquidity buffers; for example, delinquency rates on consumer debt tied to households, like credit card debt in the United States, have risen.

Looking ahead, persistent inflation leading to higher interest rates and weaker real income growth could further raise debt-servicing burdens for low-income households, while their exposure to global equities?though much more modest than that for high-income households?could be vulnerable to a market correction.

The IMF further noted that the debt-servicing capabilities and net worth of households have improved in recent years, but a resurgence of inflation and higher interest rates could test that resilience. Authorities should closely monitor household balance sheets and debt-servicing burdens, particularly in jurisdictions where mortgage payments are sensitive to interest rate fluctuations. Appropriate macroprudential measures, such as limits on loan-tovalue or debt-service-to-income ratios, can help prevent the buildup of excessive household leverage and strengthen resilience against future shocks.

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