[Practical Finance] Interest Rate Dilemma Leaves YeTech Enthusiasts in a Quandary

Interest in Alternative Investments such as Foreign Currency Deposits and Long-term Insurance

#Office worker Kim Won-young (35) recently deposited a lump sum of about 50 million won, which matured from a fixed deposit, into an internet-only bank’s demand deposit account (commonly called a parking account). Initially, he had considered stock investments, but hesitated, and with the recent gradual rise in interest rates, he was reluctant to place the money back into a fixed deposit. Kim said, “It’s hard to predict whether interest rates will rise or fall if I put it back into a fixed deposit,” adding, “I plan to keep it in the parking account and monitor the situation.”

Last year, savers who actively managed their finances were busy even with a mere 0.1 percentage point difference in interest rates, but now they find themselves in a dilemma. Despite high interest rates, deposit rates, which had been stable due to bond market stability, have recently shown a gradual increase even with the base rate held steady, leaving them uncertain. Amid growing uncertainty, these savers are taking a breather through demand deposit accounts while seeking alternative investments to balance stability and profitability.

According to the Bankers Association on the 8th, the one-year fixed deposit interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) remain at around 3.70?3.80%. Among them, Hana Bank’s Hana One Fixed Deposit offers the highest rate at 3.80%, followed by Woori Bank (3.78%), KB Kookmin Bank (3.75%), and Shinhan and NH Nonghyup Banks (3.70%).

Earlier last month, deposit rates had sharply dropped to the low 3% range, but despite the Bank of Korea’s decision to hold the base rate steady, rates have turned upward due to market interest rates. The prevailing view is that the U.S. economic recovery will prolong tightening, weakening the so-called “interest rate peak theory.”

According to the Korea Financial Investment Association, the benchmark rate for one-year fixed deposits?the AAA-rated one-year bank bond rate?rose to 5.104% in early November last year, driving deposit rate increases. However, as the bond market stabilized and optimistic outlooks spread, it fell to 3.540% in early last month. Since then, with the interest rate peak theory losing ground, bank bond rates have risen again to 3.908% (as of the 6th), despite the Bank of Korea’s base rate freeze.

However, despite this rise in market interest rates, the consensus is that there will not be a sharp increase in deposit rates like last year. Last year, the so-called ‘Legoland incident’ froze the bond market, prompting banks and financial institutions to aggressively attract deposits, causing a rapid spike in rates. Currently, banks have little incentive to compete fiercely for deposits again.

An official from a commercial bank said, “Issuance of bank bonds has resumed sequentially, and deposits secured during last year’s rapid rate hike period are ample, so banks have little incentive to compete for deposits.” He added, “With market interest rates rising, both deposit and loan rates are expected to increase moderately, but a sharp rate hike like last year is unlikely to recur.”

As it becomes difficult to grasp the direction of deposit rates, financial consumers are increasingly confused. This dilemma is reflected in the deposit balances of the five major commercial banks last month. The combined fixed deposit balance of the five banks rose by 3.4506 trillion won compared to the previous month, rebounding after three months, but the increase was not as large as during the rapid rate hike period. Meanwhile, demand deposits, classified as funds waiting for investment, increased by 20.5503 trillion won from the previous month. This indicates that a large amount of idle funds have flowed into parking accounts.

Many investors still feel burdened by asset markets such as stocks and real estate. According to the Korea Financial Investment Association, as of the 3rd, investor deposit balances stood at about 45.6 trillion won, down approximately 6 trillion won from the beginning of the month (about 51.5 trillion won). The real estate market is also widely viewed as not yet showing a full-fledged rebound.

The financial sector expects investor confusion to continue for some time. Although a sharp rise in deposit rates like last year is unlikely, financial consumers are taking a defensive stance in investments due to their negative outlook on this year’s economic situation. According to a survey conducted by Hana Financial Management Research Institute at the end of last year targeting 1,000 financial consumers aged 20?64 living in the metropolitan area, 65% of respondents said they plan to deposit in stable savings and fixed deposits this year. Only about 22% said they would prepare for high-risk, high-return investments.

Given the continued high interest in “stable investments,” the financial sector expects many investors to turn their attention to alternative investments such as high-interest foreign currency fixed deposits, fixed-rate long-term insurance products, and low-coupon bonds for the time being. A private banking officer at a commercial bank said, “Until the end of last month, fixed-rate long-term insurance products offered rates between 4.5% and 6%. Maintaining this for five years would yield about 20% returns.” He added, “With the interest rate peak theory somewhat faltering, even asset owners are focusing more on securing stable investment returns rather than chasing high yields.”