[Practical Finance] The Longer the Maturity, the Better... Investment Strategies During Interest Rate Cuts

The U.S. Federal Reserve (Fed) has signaled a potential interest rate cut next year, complicating financial consumers' investment calculations. Experts advise taking advantage of the 'last ride' on high-interest savings and time deposits before deposit rates begin to fall in earnest, while also opting for the longest possible maturity periods.

Deposit Rate Cuts Expected to Accelerate in the First Half of Next Year

According to the financial sector on the 27th, as expectations grow that the Fed may cut its benchmark interest rate three times next year, the possibility of the Bank of Korea lowering its base rate is also gaining traction. According to a report released by Woori Financial Research Institute on the 21st, investment banks BNP Paribas and Goldman Sachs predict that from the second quarter (April to June) of next year, inflation will approach the target level (2%), prompting the Bank of Korea to begin cutting its base rate. They expect a total reduction of 0.75 percentage points over three cuts throughout the year. JP Morgan and Citi forecast the Bank of Korea's rate cut timing to be the third quarter and October of next year, respectively, with a reduction of 0.5 percentage points.

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the '2023 Second Half Price Stability Target Operation Status Review Briefing' held on the 20th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

As a result, deposit rates are likely to start falling as early as the first half of next year. There is speculation that deposit rates may decline ahead of the base rate cut, reflecting market expectations in advance. Kim Daesu, PB team leader at Shinhan Bank PWM Yeouido Center, said, “Currently, the Korea-U.S. base rate gap is over 2 percentage points, so even if the U.S. lowers its base rate once, Korea will not immediately follow,” but added, “Since the market tends to move ahead of expected rate cuts, the timing of fixed deposit rate reductions could be earlier than the base rate cut.”

Must Catch the 'Last Ride' on 3-4% Deposits... Choose 3-Year Maturities Over 1-Year

Experts explain that now is the 'right time' to open savings and time deposits for interest income. Fixed deposit products offering interest rates in the high 3% to 4% range may soon disappear. As of the 22nd, in the banking sector, Sh Suhyup Bank offers 4.25% per annum on the 'Sh First Meeting Preferential Deposit' (1-year maturity), BNK Busan Bank's 'The Level Up Fixed Deposit' offers 4.15%, and DGB Daegu Bank's 'DGB Main Transaction Preferential Deposit' offers 4.05%, all exceeding 4.0% interest rates.

In the savings bank sector, DB Savings Bank offers 4.25% per annum on the 'Dream Big Fixed Deposit (6-month revolving)' product, and Aequan Savings Bank offers 4.2% on the 'Plus Revolving Fixed Deposit.' OK Savings Bank and JT Chin-Ae Savings Bank also offer 4.11% (OK e-Safe Fixed Deposit) and 4.05% (non-face-to-face revolving fixed deposit), respectively.

It is advised that the longer the fixed deposit maturity, the better. Choi Misun, PB team leader at Woori Bank TC Premium Apgujeong Center, explained, “Currently, due to the inversion of long- and short-term interest rates, short-term fixed deposit rates under 6 months are higher than long-term fixed deposit rates over 1 year, but short-term deposits may have lower rates upon renewal after maturity,” adding, “It is advantageous to choose maturities of 2 years over 1 year, and 3 years over 2 years.” Kim also said, “Since deposit rates are expected to fall further, investing in products with maturities of over 1 year is better than short-term ones.” He added, “Diversifying funds between short-term deposits offering higher immediate rates and long-term products is also a good strategy.”

If you are looking for products with maturities longer than fixed deposits, 'fixed interest savings insurance' is also a good option. These products maintain fixed interest rates for over 5 years, currently offering rates around 3.7?3.9% (based on KRW products). Fixed interest savings insurance allows early withdrawal of 80?90% of the principal without additional costs before maturity, which is advantageous for liquidity. Withdrawals that do not exceed the principal are not taxed, reducing the tax burden.

However, since funds must be tied up for a long time, it is important to consider your personal cash flow schedule before subscribing. Choi advised, “If you need to liquidate funds within 1?2 years, it is better to choose bank fixed deposits; for surplus funds, subscribing to a 5-year fixed interest product is recommended.”