Deposit interest rates at 0% range, loan rates soar... Largest loan-deposit interest rate gap in 3 and a half years

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As mortgage and credit loan interest rates have risen for seven consecutive months, the gap between deposit and loan interest rates has widened to its largest in three and a half years. This is due to financial institutions raising additional interest rates while lowering preferential rates to slow the growth of household loans. It is also analyzed that this interest rate gap partially influenced the record-high performance of major financial holding companies in the first quarter of this year.

According to the "Weighted Average Interest Rates of Financial Institutions in March 2021" announced by the Bank of Korea on the 1st, the interest rate on savings deposits at deposit banks based on new transactions rose by 1bp (1bp=0.01 percentage point) from the previous month to an annual rate of 0.86%, and the loan interest rate increased by 3bp from 2.74% in the previous month to 2.77% annually. Looking at loan interest rates, both corporate loans (5bp) and household loans (7bp) increased.

In the case of household loan interest rates, they rose significantly from 2.81% in the previous month to 2.88%. This is the highest level in 11 months since it surged to 2.89% in April last year. In particular, mortgage loan interest rates rose for seven consecutive months to 2.74%. This is the highest level in one year and nine months since June 2019 (2.74%). Banks reduced preferential interest rates to manage loan volumes, and this was influenced by the rise in the benchmark interest rate of 5-year bank bonds.

Accordingly, the gap between loan interest rates and savings deposit interest rates widened by 2bp from the previous month to 1.91 percentage points. This is the largest gap in three and a half years since it recorded 1.93 percentage points in September 2017. The interest rate spread between deposits and loans at banks has continued to widen from 1.84 percentage points in December last year to 1.85 percentage points in January this year and 1.89 percentage points in February.

While savings deposit interest rates have remained in the high 0% range, pure savings deposits rose by 0.01 percentage points, and market-type financial products increased by 0.03 percentage points centered on financial bonds and CDs. Based on the balance at the end of March, the total deposit interest rate fell by 0.02 percentage points from the previous month to an annual rate of 0.68%, while the total loan interest rate remained at 2.80% annually, the same as the previous month.

Song Jaechang, head of the Financial Statistics Team at the Bank of Korea, explained, "While mortgage and credit loan interest rates have risen for seven consecutive months, the deposit-loan interest rate gap has also widened. Regarding deposit interest rates, amid the extension of regulatory relaxations such as the loan-to-deposit ratio and liquidity coverage ratio (LCR), the factors attracting bank funds weakened due to an increase in demand deposit-type savings deposits, causing deposit interest rates to either fall or rise only slightly."

He added, "Loan interest rates increased as market interest rates rose and banks raised additional interest rates to manage household loans, thereby expanding the interest rate gap between deposits and loans."

This content was produced with the assistance of AI translation services.