Due to Base Rate Hike... Both Deposit and Loan Interest Rates Rise Rapidly

[Image source=Yonhap News]

[Asia Economy Reporter Kim Jin-ho] Following the Bank of Korea's 0.25 percentage point increase in the base interest rate, it is expected that the deposit and loan interest rates of major commercial banks will be raised one after another.

According to the financial sector on the 4th, major commercial banks will simultaneously raise the interest rates on deposit products such as savings and time deposits starting next week, reflecting the base rate hike.

First, Shinhan Bank raised savings and time deposit interest rates by 0.2 to 0.3 percentage points on the 30th of last month, and NH Nonghyup Bank also increased savings and time deposit rates by 0.05 to 0.25 percentage points starting from the 1st of this month. Internet bank K Bank had already adjusted its time deposit interest rates upward by 0.2 percentage points from the 28th of last month. KB Kookmin, Hana, Woori Banks, and KakaoBank have also decided to raise savings and time deposit interest rates soon.

According to the Bank of Korea, the average interest rate on time deposits based on new transactions at domestic banks has remained in the 0% range since May 2020 (annual 1.07%). The average interest rate on regular savings deposits has also stayed around 1.1% since July 2020, but it is expected to rise reflecting the base rate hike.

With the increase in deposit interest rates, loan interest rates such as mortgage loans are also expected to rise accordingly. The deposit interest rates that increase in September will be reflected in the 'COFIX (Cost of Funds Index)' rate in October. The COFIX rate, calculated based on the cost of funds including deposit product interest rates, is a key indicator used to determine the variable interest rates on mortgage loans.

Therefore, starting with new mortgage loans issued in October, loan interest rates are likely to increase significantly. As of the 19th, the COFIX-linked variable mortgage loan interest rates at the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?range from 2.62% to 4.13% annually.

In particular, the expectation that the Bank of Korea will raise the base interest rate further within the year could push market interest rates up more rapidly, thereby increasing household loan interest rates such as mortgages. The financial authorities' strengthening of total household loan volume management for banks is also expected to influence the rise in loan interest rates.

In the case of unsecured loans, interest rates in the 2% range are expected to disappear soon. As of the 19th of last month, the unsecured loan interest rates (grade 1, 1 year) at the four major commercial banks ranged from 2.96% to 4.01% annually. Compared to the end of July last year, the lower bound has increased by nearly 1 percentage point in one year, making further hikes inevitable due to the base rate increase.

Meanwhile, KB Kookmin Bank also raised interest rates on major loans and deposit products simultaneously starting from the 3rd. This is due to the base rate hike and the financial authorities' tightening policies on household debt.