"Now is the Peak"... Demand for Last-Minute Savings and Time Deposits Drives Money Supply Up for 1 Year

Bank of Korea's 'May Money Supply and Liquidity'
Money Supply Increases for 12 Consecutive Months Centered on Regular Savings and Time Deposits

As the base interest rate cut is anticipated in the second half of the year, the perception that interest rates are at their peak has led to increased demand for high-interest-rate last-chance deposits, mainly in regular savings and time deposits, causing the money supply in the market to rise for the first time in a year. Typically, when interest rate cuts begin, high-interest-rate products disappear, leading to increased demand to catch the last chance for high rates.

According to the 'May 2024 Money and Liquidity' report released by the Bank of Korea on the 15th, the broad money supply (M2, seasonally adjusted, average balance basis) in May reached 4,014.1 trillion won, an increase of 900 billion won from the previous month. The money supply has been increasing for a year since June last year.

M2 is an indicator used to express the amount of money circulating in the market. It includes narrow money (M1), which consists of cash, demand deposits, and passbook savings deposits, plus financial products such as money market funds (MMF), time deposits under two years, beneficiary certificates, negotiable certificates of deposit (CD), and repurchase agreements (RP).

By product, regular savings and time deposits increased by 9.3 trillion won, beneficiary certificates by 7.9 trillion won, and financial bonds by 5.9 trillion won. On the other hand, money trusts decreased by 7.7 trillion won, demand deposits by 7.2 trillion won, and passbook savings deposits by 6.3 trillion won.

A Bank of Korea official explained, "Demand for regular savings and time deposits expanded due to the perception that interest rates are at their peak, reflecting banks' efforts to attract funds, leading to an increase. Beneficiary certificates increased mainly in bond-type and stock-type funds, and financial bonds rose as banks issued more bonds due to an increase in loan assets."

Conversely, money trusts decreased as some matured trust funds were reinvested into long-term trust products. Demand deposits and passbook savings deposits declined as funds waiting for investment moved to other investment destinations such as regular savings, time deposits, and beneficiary certificates.

By economic agents, households and non-profit organizations, as well as other financial institutions, increased, while corporations and other sectors decreased. Households and non-profit organizations increased by 13.5 trillion won, mainly in regular savings and time deposits, and other financial institutions increased by 5.6 trillion won, centered on financial bonds and beneficiary certificates. Meanwhile, other sectors decreased by 7.2 trillion won, mainly in money market funds (MMF), and corporations decreased by 2.4 trillion won, mainly in passbook savings deposits and money trusts.

Meanwhile, narrow money (M1, seasonally adjusted, average balance basis) was 1,221.6 trillion won, down 13.2 trillion won from the previous month. The decrease widened from -0.8% in the previous month to -1.1% as passbook savings deposits and demand deposits declined.