[Interest Rate Response Strategy] ① Have Bank Loan Interest Rates Peaked?

Interest Rates Rising for 1 Year and 5 Months Show Signs of Decline
Commercial Banks Lower Rates One After Another in January

[Asia Economy Reporters Sim Nayoung and Yoo Jehun] Bank loan interest rates have peaked for the first time in 1 year and 5 months and are now on a downward slope. Although it is uncertain how much further they will fall or the speed of the decline, it is clear that banks’ interest rate direction is headed downward. On the 26th, KB Kookmin Bank lowered its KB mortgage loan variable interest rate by 0.75 percentage points from the previous day, setting it at 4.87~6.27%. The Jeonse Deposit Safety Loan interest rate was also cut by the same margin, bringing the upper limit rate down to the 5% range. [Related Article] 'Interest Rate Response Strategy'

The downward movement began earlier this month. Woori Bank lowered its mortgage loan variable interest rate twice this month. The rate, which was over 8% at the start of the new year, dropped to the 6% range within three weeks. NH Nonghyup Bank and Hana Bank also joined this trend around the Lunar New Year holiday. Coupled with forecasts that the U.S. base interest rate has nearly reached its final destination, the financial sector widely agrees that "loan interest rates have peaked."

Even if the Bank of Korea raises the base interest rate once more at its second monetary policy meeting of the year on the 23rd of next month, the prevailing expectation is that it will have little impact on bank interest rates. Right after the Bank of Korea raised the base rate by 0.25 percentage points on the 13th, bank interest rates actually fell due to regulatory pressure to lower rates and bond market stabilization. A senior official from the Financial Supervisory Service predicted, "Loan interest rates will show a slight downward trend throughout this year."

A senior official from the Financial Services Commission analyzed, "The interest rates that overshot after the Legoland incident are now returning to their original levels." Between October and November last year, amid a liquidity crunch in the money market, companies like KEPCO and financial institutions competed for funding, causing a sharp rise in bond interest rates such as bank bonds and bank deposit rates, which served as benchmarks for loan interest rates, leading to an excessive increase. This means the interest rate bubble formed during that period is now deflating.

Interest Rates That Rose Sharply Are Now Falling... Large Additional Drops Unlikely

According to the Bank of Korea Economic Statistics System, the household loan interest rate (new loans basis, weighted average rate) of domestic deposit banks rose sharply from August 2021. Household loan interest rates, which had stayed around 2% for nearly two years, quickly surpassed 3%. This was an immediate effect of the Bank of Korea’s base rate hikes at the time. During the ten base rate hikes carried out until January this year, household loan interest rates nearly doubled to 5.57% (as of November last year). A representative from a commercial bank said, "Once the January statistics, which clearly show the downward trend in interest rates, are reflected, the graph that had been sharply rising for 17 months will begin to bend downward gradually."

Financial authorities have influenced the spread rates directly linked to banks’ margins. Lee Bokhyun, Governor of the Financial Supervisory Service, issued repeated warnings, saying, "During the interest rate hike period, banks must not excessively raise loan interest rates compared to market rates or borrower creditworthiness" (on the 10th), and "Banks have some discretion in adjusting the spread rate" (on the 13th).

Bond interest rates also fell, naturally leading to a decline in loan interest rates. The 5-year bank bond rate, which exceeded 5% last November, dropped to 4.94% (as of the 25th) due to regulatory measures stabilizing the bond market. This is why the fixed interest rate for mortgage loans, which uses the 5-year bank bond as a benchmark, fell from the 7% range to the 6% range. The credit loan interest rate, which was over 7% at the end of last year, also fell to the 6% range recently, following the trend of the 1-year bank bond rate.

What will happen to loan interest rates going forward? The Bank of Korea has declared that there will be no base rate cuts throughout this year and that discussions on rate cuts are premature. However, the market is keeping open the possibility of a base rate cut starting in the second half of this year. Even so, the likelihood of a sharp drop in rates is low. Although the U.S. base rate decision is a variable, consumer prices are expected to remain in the mid-to-high 3% range this year, and the Bank of Korea is maintaining a tight monetary policy stance accordingly. Bank loan interest rates are expected to remain at current levels or decline slightly throughout this year.

Quiet Bank Counters... No Borrowers Applying for Loans

[Image source=Yonhap News]

Bank counters are still quiet. The real estate market remains frozen, and interest rates are still a heavy burden on households, just like last year. An employee working at a commercial bank branch in Gangnam, Seoul, said, "Although the government has lifted many regulations on mortgage loans, the transaction cliff continues, so there are almost no cases received from real estate loan counselors," adding, "Credit loan inquiries are also not many because the interest rates are high from the borrower’s perspective."

The household loan balance of the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) continued to decline in January. It was about 689 trillion won (as of the 20th), down about 3.5 trillion won from the end of December (approximately 692.5 trillion won). While the mortgage loan balance slightly increased by about 200 billion won, the credit loan balance decreased significantly by 3.3 trillion won.