Unexpected Drop in KOFIX "Interest Rate Rise Lag and Decreased Funding Demand"

[Asia Economy Reporter Yu Je-hoon] Last month, the COFIX (Cost of Funds Index), which serves as the benchmark for variable interest rates on mortgage loans in the banking sector, showed a declining trend contrary to market expectations, drawing attention to the reasons behind this. Banks analyze this as a temporary effect caused by the 'time lag' between the base rate hike and its application, as well as the 'reverse money move' that began to concentrate on fixed deposits since last year.

According to the Korea Federation of Banks on the 16th, the COFIX based on new transaction amounts last month was 1.64%, down 0.05 percentage points from the previous month (1.69%). This marks the first decline in the COFIX based on new transaction amounts in eight months since June last year.

Accordingly, commercial banks will reflect the previous month's COFIX rate level in the variable interest rates for new mortgage loans starting today. For KB Kookmin Bank, the variable interest rate based on new transaction amounts will decrease from 3.73?5.23% to 3.68?5.18%, and NongHyup Bank will also adjust downward from 3.47?4.37% to 3.42?4.32%. Woori Bank will lower both the upper and lower limits by 0.05 percentage points each, from 3.88?4.89% to 3.83?4.84%.

COFIX is the weighted average interest rate of funds raised by eight domestic banks (KB Kookmin, Shinhan, Hana, Woori, NongHyup, Industrial Bank of Korea, SC First Bank, and Citibank Korea), reflecting changes in interest rates of deposit products such as actual deposits, savings, and bank bonds handled by banks, causing it to rise or fall accordingly.

Initially, the market widely expected COFIX to show an upward trend last month as well, anticipating that the deposit interest rates in the banking sector would have risen due to three base rate hikes from August last year to last month.

The industry points to the time difference between the base rate hike and the timing of deposit interest rate increases as the reason COFIX trends deviated from expectations. While the COFIX based on new transaction amounts, calculated from funds newly raised in the relevant month, declined, the balance-based and new balance-based COFIX rose by 0.07 percentage points and 0.05 percentage points, respectively.

A Korea Federation of Banks official explained, "In reality, most banks saw a decline in fixed deposit interest rates compared to the end of the year," adding, "Although banks intended to raise deposit interest rates following the base rate hike, this effect has not yet been reflected."

There is also an analysis that during the rate hike period, funds in the market flowed into safe assets such as fixed deposits, resulting in lower-than-expected demand for fund procurement in the banking sector. Additionally, seasonal factors reflecting reduced market fund demand at the beginning of the year were also considered. The total deposit balance of the five major banks (KB Kookmin, Shinhan, Woori, Hana, NongHyup) as of the end of last month was approximately KRW 1,788 trillion, an increase of about KRW 34 trillion compared to the previous month.

Meanwhile, the financial sector expects mortgage loan interest rates to show a steep rise as the effects of future base rate hikes are reflected. The 5-year bank bond (AAA grade), which serves as the benchmark for fixed mortgage loan rates, stood at 2.790% as of the 14th, up 0.535 percentage points compared to the end of last year. A banking sector official said, "The decline in COFIX last month is interpreted as a phenomenon caused by the time lag between the base rate hike and the actual deposit interest rate increase, as well as a decrease in fund procurement demand," adding, "As this effect is reflected, mortgage loan interest rates will continue to rise."