[Debt Diet]② Declining Appeal of Deposit Interest Rates... Paying Off Debt and Withdrawing Money

Interest Rates Drop from 5% to 3% Range: "Better to Pay Off Debt First"

[Asia Economy Reporter Yu Je-hoon] The reason borrowers are focusing on interest reduction is attributed to the soaring loan interest rates and the declining attractiveness of deposit interest rates. The fixed deposit interest rates, which once exceeded 5%, have dropped to the 3% range, spreading the sentiment of "let's pay off debt first." Along with this, recent signals indicating that inflation in the United States is easing have led to growing interest in asset markets such as stocks, which showed lackluster performance throughout last year.

"Decrease in deposit balances also related to loan repayments"

According to the financial sector on the 3rd, the total deposit balance of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) as of the end of last month was 1,870.0581 trillion KRW. This is a decrease of 7.3862 trillion KRW compared to the previous month (1,877.4443 trillion KRW).

Looking at the detailed breakdown, most deposit balances decreased. The demand deposit balance, including money market deposit accounts (MMDA), decreased by 35.9835 trillion KRW to 588.6031 trillion KRW. Demand deposits have relatively low interest rates but are freely accessible, so they are classified as "funds waiting for investment." Fixed deposits and installment savings also showed a declining trend. The fixed deposit balance of the five major banks as of the end of last month was 822.25 trillion KRW, down 6.1866 trillion KRW from the previous month. The installment savings balance remained at 36.8367 trillion KRW, down 3.943 billion KRW from the previous month.

The decline in bank deposits is largely attributed to the recent reduction in deposit interest rates. Due to the stabilization of market interest rates, deposit interest rates in the banking sector have also stabilized downward, causing deposits to lose their appeal. According to the Korea Federation of Banks, as of the previous day, the upper limit of the one-year fixed deposit interest rates at the five major commercial banks fell to 3.51?3.73%. This represents a drop of nearly 2 percentage points within three months. Additionally, the upper limit of interest rates on money market deposit accounts (so-called parking accounts), which were a key part of last year's deposit competition, is also gradually decreasing.

Deposit interest rates at other financial institutions outside banks are also losing their appeal. According to the Korea Federation of Savings Banks, the average one-year fixed deposit interest rate at mutual savings banks was 4.61% as of the previous day, down 0.76 percentage points from one month ago (5.37%) and nearly 1 percentage point from two months ago (5.53%). Mutual financial institutions such as agricultural and fisheries cooperatives, credit cooperatives, and Saemaeul Geumgo, which offered special promotional products in the 7% range last year, are now offering products mostly in the 5% range.

The banking sector particularly views the decrease in deposit balances as related to borrowers' debt repayments. Since the asset market remains highly uncertain and deposit products, which were considered alternatives, have lost their appeal, the sentiment of "let's pay off debt now" is spreading. A representative from a major commercial bank said, "Although it is difficult to track individual borrowers' cash flows, internally we understand that the decrease in demand deposits from December last year through January this year is linked to loan repayments," adding, "As deposit interest rates stabilize downward, this trend is expected to intensify as fixed deposits subscribed to last year mature."

Paying off debt and leaving banks? Slight increase in investor deposits

As the attractiveness of deposit products declines, financial consumers seem to be repaying loans while turning their attention to investment products offering better returns. According to the Korea Financial Investment Association, investor deposits held at securities firms amounted to 49.2749 trillion KRW as of the end of last month. This is about 5 trillion KRW higher than the mid-January low point of 44.1599 trillion KRW.

A representative from Bank B said, "Recently, the balance of overdraft accounts has been decreasing monthly, but during the stock market boom in January this year, there was a period when overdraft balances increased sharply," adding, "It seems that interest in stock market investment is returning recently."

However, it is still considered difficult to say that a 'money move' from banks to asset markets is currently underway. Even investor deposits remain lower than the approximately 70 trillion KRW at the end of January last year and the early-year peak of about 50 trillion KRW.

Nevertheless, as U.S. inflation slows down and expectations grow that the Federal Reserve (Fed) may conclude its rate hike cycle within this year, the mood is gradually improving. Fed Chair Jerome Powell, at a press conference following the Federal Open Market Committee (FOMC) meeting yesterday (Korean time), stated that while tightening policies will be maintained for the time being, inflation has somewhat eased, raising market expectations.

A financial sector official said, "Recently, parking account interest rates are also around 2%, so the gap with deposits is not large," adding, "More asset holders are depositing spare funds in parking accounts and looking for investment opportunities in the stock market after earnings announcements or in the rapidly selling real estate market in the second half of the year."