[Base Rate 1% Era] Savings and Deposit Rates Also Rise... Will Market Funds Flow In?

Exposed Loopholes in Bank Deposit and Savings Interest Rates
Financial Authorities Closely Monitoring

[Asia Economy Reporter Park Sun-mi] As the Bank of Korea raised the base interest rate by an additional 0.25 percentage points on the 25th, it has become inevitable for banks to adjust their deposit and savings interest rates as well. Since banks have sharply increased loan interest rates so far as part of managing the total volume of household loans, causing consumer dissatisfaction, it is expected that this time they will increase deposit interest rates more significantly to narrow the gap between deposit and loan interest rates. If deposit and savings interest rates rise more than expected, there is also a possibility that idle funds, which had flowed into the stock market and cryptocurrencies, will move back to banks.

According to the banking sector on the 25th, as the era of a 1% base interest rate begins, commercial banks are reflecting this by moving in the direction of raising interest rates on deposit and savings products and are in the final stages of adjusting the magnitude of the increase.

The gap between deposit and loan interest rates (deposit interest rate and loan interest rate) has widened to an average of 2.1 percentage points, the largest gap since 2010, and there is a consensus within the banking sector that interest rates should be raised more than the recent base rate hike. A representative from a commercial bank said, "We recognize consumers' complaints that loan interest rates are too high while deposit interest rates are low," adding, "There is a high possibility that the increase in deposit interest rates will be larger than the increase applied during the August base rate hike."

In fact, the fixed deposit interest rates of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?are currently around 0.5% to 1.79% per annum even after reflecting various preferential rates as of the 25th. The average is about 1.37% per annum, which is significantly lower than the 3.6% to 4.2% interest rates on unsecured loans.

The financial authorities’ close monitoring of the widening gap between deposit and loan interest rates is also expected to influence the banks’ decisions on the extent of deposit interest rate hikes. On the 23rd, Financial Supervisory Service (FSS) Governor Jeong Eun-bo told reporters that while they would not intervene in the determination of deposit and loan product interest rates by banks, they are closely watching the widening gap and examining its causes.

The FSS has previously convened deputy heads of banks to begin reviewing the interest rate calculation system. The FSS pointed out that banks excessively emphasize the highest interest rates when selling deposit and savings products, but the actual rates received fall short of these, and issued a consumer alert ‘Caution’ the day before regarding the sale of deposit and savings products offering preferential interest rates.

When banks sell special deposit and savings products, they advertise high interest rates by listing the highest interest rate in the key explanatory documents, but the interest rates paid to matured customers are only about 78% of the highest rate (average of 21 matured products). It was pointed out that banks require customers to meet complicated and difficult conditions to receive preferential interest rates?such as registering for open banking, achieving usage performance of affiliated products, and pension transfer performance?which is the background for this discrepancy.