The Bank of Korea: "Significant Increase in Financial Sector Deposits Following Base Rate Hike"

Since the Bank of Korea began raising its benchmark interest rate in the second half of last year, deposits in the financial sector have shown a strong upward trend.

According to the Monetary and Credit Policy Report released by the Bank of Korea on the 9th, the average monthly increase in financial sector deposits from July last year to April this year was 37.5 trillion won.

This is similar to the average monthly increase of 39.8 trillion won during the period from January to June last year, just before the interest rate hikes. The Bank of Korea raised the benchmark interest rate five times over ten months, from 0.75% in August last year to 1.75% last month.

By sector, the increase in bank deposits fell from an average of 16.7 trillion won per month before the rate hikes to 13 trillion won during the rate hike period, while non-bank financial institutions saw an increase from 23.1 trillion won to 24.4 trillion won, showing a strong growth trend across all financial institutions.

By deposit product type, demand deposits increased by an average of 8.3 trillion won per month, a sharp decline compared to 18.9 trillion won before the rate hikes, whereas savings deposits expanded significantly from 4.7 trillion won to 13.7 trillion won.

The Bank of Korea explained, "Comparing the fund flows by deposit product during this rate hike period with the period before the hikes, the increase in demand deposits has narrowed, while the increase in savings and investment deposits has expanded," adding, "Demand deposits have shrunk or decreased across sectors as the opportunity cost of holding them has continuously increased."

The shortening of deposit maturities was found to have intensified compared to the period just before the benchmark interest rate hikes.

The proportion of short-term deposits in total financial sector deposits rose from an average of 41% per month before the hikes to 41.7% during the rate hike period, which is also higher than the usual level (monthly average of 37.9% from 2018 to 2020).

Regarding this, the Bank of Korea explained, "In this rate hike period, due to expectations of further market interest rate increases amid the ongoing rate hike trend, depositors have tended to manage maturities more short-term, leading to a significant increase in deposits with maturities under six months among savings products."

It analyzed that funds seeking returns for asset investment flowed into short-term deposits, and expectations of further benchmark rate hikes and increased external uncertainties acted as factors favoring short-term deposits.

However, the Bank of Korea expects that as monetary policy normalizes in the future and market interest rates rise further, the degree of shortening in deposit maturities in the financial sector will gradually ease.

The Bank of Korea explained, "In this case, not only will market liquidity be restricted from being used for asset investment purposes, but the rise in the proportion of high-cost savings deposits will increase financial institutions’ funding costs, which will also act as a factor suppressing loan demand through higher lending rates."

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