[Reverse Market Interest Rates]② Confused E-yetec Jok: 'Which Beat Should We Follow?'

Disappointment After Waiting Amid Expectations of Additional Base Rate Hike
Focus on Long-term Fixed Deposits and Fixed-rate Insurance

[Asia Economy Reporter Yu Je-hoon] Shin Bo-ram (33), an office worker living in the Seoul metropolitan area, last year diversified about 80 million won out of the 100 million won she had carefully saved into a 2-year fixed deposit product at a savings bank with an annual interest rate in the 6% range and a 5-year fixed interest savings insurance product. Since 1 to 2 base rate hikes were expected in the new year, she planned to invest the remaining 20 million won in high-interest deposit products that would be released after the rate hikes. However, when the new year arrived, deposit interest rates at commercial banks as well as secondary financial institutions began to plummet sharply. Shin said, "I think I have to aim for special promotional products."

Lee Byung-kyu (34), also an office worker, is another case who was disappointed after expecting deposit interest rate hikes. Believing the base rate hikes would continue for some time, he deposited the entire 120 million won balance of his matured fixed deposit into demand deposit accounts at mutual savings banks and internet-only banks offering interest rates of 3.2% to 4.0%. He planned to selectively invest in high-interest deposit products once the base rate hikes peaked. However, his expectations soon turned into disappointment. He said, "Until recently, I wouldn't even look at products with 5% interest, but now, I would be grateful for a 4% fixed deposit at commercial banks."

Despite the Bank of Korea's base rate hike stance, deposit interest rates at banks, savings banks, and mutual financial institutions have been retreating, causing the so-called "interest rate nomads" who had been searching for high-interest deposit products over the past year to become confused. The financial sector advises that since the pace of deposit interest rate hikes is expected to slow significantly going forward, attention should be paid to long-term, high-interest financial products.

According to the Bank of Korea on the 13th, as of the end of December last year, the deposit balance in the banking sector was 2,243.5 trillion won. This is a decrease of 15.2 trillion won compared to the previous month. Considering that the deposit balance increased by 6.8 trillion won in October and 6.5 trillion won in November, the mood among financial consumers changed significantly within a month.

The main driver of the decrease in bank deposits was undoubtedly fixed deposits. Last month, the fixed deposit balance in the banking sector decreased by 15.1 trillion won from the previous month to 944.2 trillion won. On the other hand, demand deposits, which had decreased by more than 100 trillion won over the past year, rebounded by increasing 11.6 trillion won to 899.2 trillion won. The seasonal factor is cited as the reason for the shift to a decrease in December, given that local governments withdrew funds for year-end fiscal execution and corporate year-end cash demand was reflected.

However, the easing of competition for deposit attraction in the financial sector is also pointed out as one cause. In the case of commercial banks, some banks such as Woori Bank, NH Nonghyup Bank, and Hana Bank offered fixed deposit products with interest rates in the 5% range in November, but currently, such products are virtually nonexistent. According to the Bankers Association disclosure, the upper limit of interest rates for 1-year fixed deposit (simple interest) products at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) remains between 3.78% and 4.60% including preferential rates. Excluding special products such as first-time deposit accounts, the upper limit drops to the low 4% range.

As deposit interest rates fall in the banking sector, deposit interest rates at savings banks and mutual financial institutions are also being adjusted downward. According to the Korea Federation of Savings Banks, as of this date, the average interest rate for 1-year fixed deposits at savings banks was 5.20%. This is a 0.33 percentage point decrease compared to the average rate of 5.53% at the end of November last year when competition among financial institutions for deposits was intense. Although there were products with interest rates exceeding 6% at one time, the highest interest rate product as of this date was a revolving fixed deposit product at HB Savings Bank with an interest rate of 5.50% per annum.

Following the Bank of Korea's base rate hike, some banks are considering raising interest rates on deposit products, but the increase is likely to be limited. The Bank of Korea explained this phenomenon by stating, "There is a slowdown in the inflow of household and corporate funds due to the easing of competition among banks for deposits."

The financial sector suggests long-term fixed deposits and fixed interest savings insurance products as alternatives, given the likelihood of a continued downward trend in market interest rates. A representative from a commercial bank said, "Although fixed deposit interest rates will not rise quickly, they can still be considered to offer higher returns than securities and real estate markets. Considering that interest rates may stagnate or decline in the long term, it is worth considering fixed deposit products with maturities of three years or more or fixed interest savings insurance products."