Rising Possibility of Interest Rate Cuts... Spotlight on Parking Accounts [1mm Financial Talk]

Recently, as idle funds in the market have begun to flow into safe assets such as fixed deposits, interest in high-interest demand deposit accounts (commonly known as parking accounts) has surged again. This is due to the increasing likelihood of interest rate cuts in the second half of the year, as well as the growing uncertainty in investment asset markets caused by concerns over a U.S. economic recession and the resulting stock market crash. Savings banks are also responding by raising the interest rates on existing parking account products, keeping in mind the expansion of their operations.

According to the financial sector on the 12th, SBI Savings Bank, the largest mutual savings bank, recently raised the interest rate on its parking account, the Saida Demand Deposit Account, from an annual 2.9% to 3.2% for balances up to 100 million KRW. This is the first time SBI Savings Bank has increased the interest rate on its parking account since June last year.

On the 4th, as loan interest rates fell and the interest rate spread between deposits and loans narrowed, a banner displaying deposit interest rates was posted on the exterior wall of a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

This interest rate level is not significantly different from the interest rates on fixed deposit products offered by commercial banks. According to the Korea Federation of Banks, the one-year fixed deposit interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) range from 3.30% to 3.40%, only 0.1 to 0.2 percentage points higher. Considering that fixed deposits do not allow fund movement until maturity after a single deposit, while parking accounts allow frequent deposits and withdrawals, parking accounts offer considerable merit despite the slight interest rate difference.

Other savings banks are also selling parking account products with relatively high interest rates. OK Savings Bank’s "OK Jjantech Account" offers an annual interest rate of 7.0% for balances up to 500,000 KRW and 3.3% for balances up to 100 million KRW. The OK Parking Flex Account provides an annual interest rate of 3.5% (before tax) for balances up to 5 million KRW and 3.0% for balances up to 300 million KRW.

The resurgence in popularity of parking account products is due to the uncertain market conditions. First, the securities market has recently experienced sharp fluctuations amid concerns over a U.S. economic recession. According to the Bank of Korea, the KOSPI index, which rose to 2,891.35 based on closing prices in early last month, continued to decline and fell nearly 100 points to 2,441.55 on the 5th due to negative news from the U.S. stock market. Although the closing price rebounded to 2,568.41 as of the 7th, market confusion over whether the U.S. will enter a recession remains unresolved.

Another factor is the broad expectation of an interest rate cut in the second half of the year. With forecasts that the U.S. Federal Reserve (Fed) will cut interest rates by at least 25 basis points (1bp = 0.01%) in September, and the Bank of Korea is expected to follow suit around the same time, demand is pouring in to catch the last wave of relatively high-interest deposit products. In fact, the total increase in fixed deposits at the five major commercial banks in July reached 18.1879 trillion KRW. This suggests that parking account demand may rise as a way to simultaneously respond to market uncertainty and anticipated interest rate cuts.

The savings bank sector also has its reasons. Previously, savings banks had been reducing their loan and deposit assets amid sustained high interest rates, but with interest rate cuts expected in the second half of the year, securing "ammunition" has become urgent. A representative from the savings bank sector said, "With year-end deposit maturities approaching and the interest rate cut period coming, it is necessary to secure 'ammunition' to expand loan assets," adding, "(Parking accounts) are more complex in procedure compared to fixed deposits but are an attractive funding method because they incur lower funding costs."