[Asia Economy Reporter Seo So-jeong] The Bank of Korea recently analyzed that the transmission effect of bank loan interest rates due to recent rate hikes is limited compared to the previous rate hike period, due to banks lowering their additional interest rates. Furthermore, even if the base rate is raised further in the future, if banks maintain their current accommodative lending stance, the transmission rate of loan interest rates is expected not to deviate significantly from the past average.
Kim Jeong-hoon, head of the Market General Team, and Chu Myung-sam, manager of the Financial Market Department at the Bank of Korea, posted on the Bank of Korea blog on the 17th titled "Transmission Effect of Loan Interest Rates during Recent Base Rate Hikes," stating, "Since the second half of last year, loan interest rates have been rising due to base rate hikes, increasing interest in loan rate fluctuations." The Bank of Korea’s base rate hikes affect loan interest rates with a time lag through changes in short- and long-term market interest rates, influencing banks’ funding costs such as COFIX.
Considering that expectations of base rate hikes are pre-reflected in market interest rates and affect loan interest rates, the rate hike period was set from June last year to June this year. Since banks’ household loan stance eased after March, the recent rate hike period was defined as March to June this year (a 0.50 percentage point increase in the base rate), and the previous rate hike period as June last year to February this year (a 0.75 percentage point increase), for analysis.
According to the analysis, the monthly average increase in bank loan interest rates during the recent rate hike period narrowed for household loans compared to the previous rate hike period but slightly expanded for corporate loans. During the recent rate hike period, both household and corporate loans saw a reduction in additional interest rates, resulting in loan interest rate increases smaller than the rise in benchmark interest rates. The loan interest rate change relative to benchmark rate changes was 61% for household loans and 85% for corporate loans, both below 100%.
Examining the transmission effect of base rate hikes on loan interest rates by transmission rate, the transmission rate declined during the recent rate hike period, mainly for household mortgage loans. The transmission rate for household loans during the recent rate hike period was 60.0%, significantly lower than 138.7% during the previous rate hike period, while the corporate loan transmission rate slightly increased to 94.0% from 93.3% previously.
By loan type, the transmission rates for household mortgage loans and unsecured loans during the recent rate hike period were 32.0% and 134.0%, respectively, significantly lower than 158.7% and 218.7% during the previous rate hike period, due to banks strengthening operations such as lowering additional interest rates since March. Transmission rates for large and small-to-medium enterprise loans were both 94.0%, showing similar levels to the previous rate hike period (93.3% and 101.3%, respectively) despite banks’ continued accommodative lending stance and rising benchmark rates.
Team leader Kim explained, "Comparing the transmission rates during the recent rate hike period with the previous one, the transmission rate for household loans, especially mortgage loans, was relatively much lower by loan type," adding, "In past rate hike cycles, the transmission rate of loan interest rates generally declined toward the latter part of the rate hike cycle."
However, he noted, "With the normalization trend of monetary policies in major countries, loan interest rates are expected to continue rising for some time, increasing interest burdens for households and businesses," and added, "Policy authorities need to continue policy support such as converting variable-rate loans to fixed-rate loans and refinancing at low interest rates to alleviate the interest burden on vulnerable borrowers."
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