Opening of 4% Interest Era for Commercial Bank Deposits... 5% Possible by Year-End

IBK Industrial Bank Offers Up to 4.40% Annually
Savings Banks Introduce 4%+ Deposits from Early Month
Base Rate Hike Expected to Push Year-End Rates to 5% Range
Rising Bank Funding Costs Increase Loan Interest Burden

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Banks have started offering fixed deposit products with interest rates in the 4% range. As central banks worldwide continue tightening policies and raising benchmark interest rates, deposit product rates such as savings and fixed deposits are expected to remain high for the time being.

According to the Bankers Association on the 26th, IBK Industrial Bank’s ‘1seok7jo Account (Fixed Deposit)’ offers an annual interest rate of 4.33% for a 24-month term. If the contract period is extended to 36 months, the interest rate rises to 4.40%. Gwangju Bank also offers up to 4.12% interest through its ‘Smart Moa Dream Fixed Deposit’ product.

Interest rates for 12-month products are also approaching the 4% range. On the 23rd, Woori Bank announced that the maturity interest rate for its representative fixed deposit product, ‘WON Plus Deposit’ (12-month term), is 3.99% per annum. Including a special Chuseok holiday preferential rate (0.30%p), this is the highest interest rate among one-year fixed deposits at commercial banks. Additionally, DGB Daegu Bank (3.81%), Shinhan Bank and Hana Bank (each 3.80%) also offer interest rates in the high 3% range. This contrasts sharply with the early-year fixed deposit rates at commercial banks, which were only in the 1% range.

Savings banks have already introduced 4% range products since early this month. Since June 7, Daehan Savings Bank has offered a 4.00% interest rate (12-month term) on its ‘Fixed Deposit (Internet Banking)’ product. Following this, Heungkuk Savings Bank, Dongyang Savings Bank, and Kiwoom Savings Bank launched products with an annual interest rate of 4.15% (12-month term). On the 23rd, the Sangsangin Group raised the interest rates on its affiliates Sangsangin Savings Bank and Sangsangin Plus Savings Bank’s non-face-to-face exclusive revolving fixed deposits and fixed deposits to 4.21%.

With benchmark interest rates expected to continue rising steadily, there are forecasts that fixed deposits with interest rates in the 5% range could appear by the end of the year. The dominant view is that the U.S. Federal Reserve (Fed) will raise the benchmark interest rate from the current 3.00?3.25% to 4.25?4.5% at the Federal Open Market Committee (FOMC) regular meetings in October and December. Accordingly, the Bank of Korea is also expected to raise its current 2.5% benchmark interest rate by 0.75?1.0 percentage points at the Monetary Policy Committee meetings scheduled for October and November. Even reflecting only the benchmark rate hikes, fixed deposit interest rates could reach the 5% range. Considering that banks are raising deposit product rates amid regulatory pressure on interest income, the prospect of a 5% deposit era is gaining momentum.

The flow of funds moving from asset markets to bank savings and fixed deposits is expected to intensify. As of the 23rd, the total balance of fixed deposits and savings at the five major commercial banks?Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?stood at 786.1254 trillion KRW. Compared to 729.8206 trillion KRW at the end of last month, this represents an increase of about 56 trillion KRW in less than a month. Meanwhile, frozen stock markets continue to see daily outflows of funds. As of the 21st, investor deposits, which serve as standby funds for the stock market, hit a yearly low of 50.779 trillion KRW. This is nearly 25 trillion KRW less than at the beginning of the year, returning to levels seen in August 2020. With the real estate market also slowing, the movement of funds into banks is expected to continue.

As deposit interest rates rise, loan interest rates are also expected to increase. The more funds flow into higher-interest fixed deposits and savings, the higher the banks’ funding costs due to interest payments, which inevitably leads to rising loan interest rates. The Cost of Funds Index (COFIX), which serves as the benchmark for variable-rate mortgage loans, particularly reflects deposit product interest rates quickly. Last month, COFIX rose to 2.96%, an increase of 1.25 percentage points since the beginning of the year.