Why We Can't Smile Despite Rising Deposit Interest Rates After Sleeping

Rising Deposit Interest Rates Push Up Loan Interest Rates

Most Borrowers Cannot Afford Deposits or Savings

Commercial Banks: "In the End, Only Borrowers Suffer Losses"

[Image source=Yonhap News]

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Since the Bank of Korea raised the base interest rate on the 25th of last month, commercial banks, internet banks, and regional banks alike have all joined the trend of raising savings and deposit interest rates through this month.

Due to the rapidly rising interest rates and the sluggish asset market including stocks and real estate, the amount of new fixed savings and deposits inflow into the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) from January to August this year reached 67.6442 trillion KRW (from 690.0366 trillion KRW to 757.6808 trillion KRW).

However, banks are concerned that the increase in savings and deposit interest rates will boomerang back by pushing up loan interest rates. A representative from a commercial bank said, "Most people who have taken out loans do not have the luxury to save in savings or deposits, so if savings and deposit interest rates rise and loan interest rates increase, only those who have borrowed will suffer losses."

There is a background to this concern. The impact of rising savings and deposit interest rates is directly passed on as a shock to COFIX, which is the basis for calculating mortgage and credit loan interest rates.

COFIX is the weighted average interest rate of funds raised by eight domestic banks. It reflects changes in interest rates of deposit products such as savings, deposits, and bank bonds handled by banks. When savings and deposit interest rates rise, COFIX also rises accordingly.

[Image source=Yonhap News]

Since the Yoon Suk-yeol administration faced heavy criticism for the widening interest rate spread between loans and deposits (loan interest rate - deposit interest rate), banks began to feel pressure. Every time the Bank of Korea raised the base interest rate this year, banks immediately raised savings and deposit interest rates.

In summary, throughout this year, a vicious cycle of 'base interest rate hike → savings and deposit interest rate increase → COFIX increase → loan interest rate increase' has been ongoing.

This can be seen in the actual interest rate trends. The Bank of Korea raised the base interest rate on January 14 (0.25 percentage points (p)), April 14 (0.25%p), May 26 (0.25%p), and July 15 (0.5%p). Each time, banks raised savings and deposit interest rates by up to 0.5%p. COFIX, especially from April to July when the base rate started rising intensively, jumped a total of 1.18%p to reach 2.90%.

The variable rate for mortgage loans is renewed every six months and rises exactly by the amount COFIX increases. New loan interest rates are also calculated by adding a bank margin (spread) to COFIX, so they inevitably rise.

Another commercial bank official said, "The COFIX for August, to be announced on the 15th, is also likely to rise sharply, so a backlash of rising loan interest rates may hit after mid-month."