No Fun Putting Lump Sums in Deposits at 1% Interest... Loans Stuck in the 4% Range

Loan-Deposit Interest Rate Spread Widens for 8 Consecutive Months
Seven Major Bank Deposit Products Now Offer 1-Year Base Rates in the 1% Range
Average Mortgage Rates at Top Five Banks Remain in the 4% Range
Demand Deposits Plunge by 20.7 Trillion Won in Just One Month

As the era of full-scale interest rate cuts begins, the downward trend in deposit interest rates continues. For the first time in about three years since 2022, major banks are now offering one-year term deposits with annual interest rates in the 1% range. In contrast, loan interest rates have either barely decreased or remained unchanged, resulting in the loan-deposit interest rate spread (loan rate minus deposit rate) widening for eight consecutive months. Consequently, demand deposits, which are considered idle funds awaiting investment opportunities, are rapidly flowing out.

According to the banking sector on May 16, Hana Bank and Woori Bank have lowered the base interest rates on their deposit products by 0.2 to 0.3 percentage points. Hana Bank reduced rates by 0.10 to 0.30 percentage points on five types of 'Hana Regular Deposit' products, as well as seven other products including 'Salary Hana Monthly Compound Interest Savings.' Woori Bank also cut the rate on its 'Woori First Transaction Preferential Regular Deposit' by 0.20 percentage points. Previously, major commercial banks had lowered deposit rates at the end of March, citing falling market rates, but have now implemented additional cuts in less than two months.

As major commercial banks continue to lower interest rates on both deposits and savings, the base interest rates for key deposit products have dropped to the 1% range. According to the Korea Federation of Banks, as of May 15, the base interest rates for one-year term deposits at 1% are as follows: Shinhan Bank Ssol Convenient Regular Deposit (1.80%), Hana Bank Hana Regular Deposit (1.80%), KB Kookmin Bank KB Star Regular Deposit (1.80%), iM Bank iM Smart Deposit (1.60%), BNK Busan Bank The Special Regular Deposit (1.40%), LIVE Regular Deposit (1.80%), and Jeju Bank J Regular Deposit (1.40%)?a total of seven products. Savings deposit rates show a similar trend. Among major banks' one-year free installment savings products, Hana Bank NaeMam Savings (1.80%) and Jeju Bank TaminaYo Savings (1.90%) are also offering rates in the 1% range.

In contrast, loan interest rates remain largely unchanged. The average interest rates on amortized mortgage loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stand at 4.16% to 4.40%, maintaining the 4% range. Although the Bank of Korea has cut the base rate three times since October last year, loan interest rates have been slower to decrease compared to deposit rates.

While deposit rates are falling rapidly, loan rates remain high in the 4% range, causing the loan-deposit interest rate spread to widen for eight consecutive months. The average household loan-deposit interest rate spread, excluding policy-based loans for low-income households at the five major banks, is 1.472 percentage points, marking eight straight months of expansion. By bank, the spread excluding policy-based loans is as follows: NH Nonghyup Bank at 1.55 percentage points, Shinhan Bank at 1.51 percentage points, KB Kookmin Bank at 1.49 percentage points, Hana Bank at 1.43 percentage points, and Woori Bank at 1.38 percentage points?all wider than the previous month. For Shinhan Bank and Hana Bank, this is the largest spread since public disclosure began in July 2022.

Given these circumstances, demand deposits, which are regarded as idle funds awaiting investment, are rapidly flowing out. As of the end of last month, demand deposits at the five major commercial banks stood at 629.3498 trillion won, a decrease of 20.7743 trillion won in just one month.

An official at a major commercial bank stated, "Due to the policy stance of managing household debt, it is also difficult to lower loan interest rates," and added, "Since deposit and savings rates are in the 1% to 2% range, demand deposits appear to be flowing mainly into the stock market or virtual asset markets."