[Opinion] 20% Interest Rate Song Eun-yi's Bank Account and the Era of High Interest Rates

Current Interest Rates at the Lowest Level Since Dangun
Both Interest Rate Decrease and Increase Should Be Considered Possible

Broadcaster Song Eun-i still holds a bank account with an interest rate in the 20% range from the 1990s. In a broadcast 2 to 3 years ago, she said, "Just looking at it makes me happy," and "I will never cancel it." These days, bank fixed deposit interest rates are in the 3% range. From today's perspective, Song Eun-i's account interest rate seems unbelievably high. However, such rates were quite possible in the past.

The Bank of Korea revealed that in 1992, the average interest rate on fixed deposits at commercial banks was 10% (according to the Bank of Korea Economic Statistics Department). Also, during the International Monetary Fund (IMF) period in 1998, the average fixed deposit interest rate at banks was 13.3%. By the end of that year, fixed deposit rates at commercial banks even soared to 20%. Interest rates at savings banks and other secondary financial institutions were even higher. Deposits and corporate bonds with interest rates of 20-30% were not uncommon. This can be considered a special situation at the time. However, 30 years before that, in 1968, the average bank interest rate was 25%.

Of course, interest rates have steadily declined. The Bank of Korea's base rate fell to the 1% range in 2015. Later, in 2020, the base rate dropped to as low as 0.5%. However, interest rates have recently risen sharply. The current base rate is 3.5%. Naturally, general loan interest rates are even higher. People say they are struggling because interest has risen too much.

But if you think about it carefully, in the half-millennium history, interest rates have never been as low as they are now. Let's look at interest rates during the Joseon Dynasty. For example, King Gyeongjong set the interest rate at 33% per year, and King Seongjong set it at 10% per month, or 50% per year. The problem was that these were government-managed public bond interest rates. Private loan interest rates were unbearably high. The representative principal and interest repayment methods in the Joseon Dynasty were ilsu, wolsu, and jangri. Ilsu and wolsu are still used today. The most widely used method at the time was jangri. In spring, when stored grain was all gone during the "boritgogae" (barley hump) period, grain was lent, and about eight months later in autumn, more than 50% of the borrowed amount was collected as interest. King Yeongjo set the public bond interest rate at 20% per year and the private loan interest rate at 20% per year, ordering that those who did not comply be punished with 100 strokes of the cane. This implies that many people were charging interest rates higher than 20%.

What about overseas? Interest rates in the United States are generally lower than in Korea. From 2009 to 2014, the annual average interest rate was as low as 0.25%. In 2021, the rate also dropped to 0.25%. Of course, there were times when U.S. interest rates soared to the sky. In 1980, they reached as high as 22%. Currently, U.S. interest rates are between 5.25% and 5.5%. Money moves to places offering higher interest. When money moves from country to country, another variable is the exchange rate. In 1980, 1 dollar was 659.9 won; in 1990, it was 716.7 won. The 1 dollar that was 1,086.3 won in 2020 was 1,333.8 won on the 30th. Experience shows that the dollar's value has continuously risen. If U.S. interest rates are also higher, Korean money will eventually flow to the U.S. On the 19th, after the Monetary Policy Committee meeting, Lee Chang-yong, Governor of the Bank of Korea, told reporters, "The committee members think it is premature to discuss lowering interest rates under the current circumstances." This means, "We know you want interest rates to go down, but conditions make it difficult."

The zero interest rate era will come again, or the era of Song Eun-i's account interest rates will return. If asked which is more likely, it is hard to answer. What is certain is that the possibility of both is very low. Assuming that interest rates will naturally fall because they are high now and making decisions based on that is a gamble. It seems that caution rather than courage is needed at this time.