[Practical Finance] Year-End Interest Rate Expected at 3%... Is It the Right Time for Loans and Deposits?

The COVID-19 pandemic, the Russia-Ukraine war, China's lockdown measures, the U.S. interest rate hikes, and soaring international oil prices have all contributed to ongoing inflation. On the 20th, citizens were shopping at a large supermarket in downtown Seoul.
Photo by Moon Honam munonam@

[Asia Economy Reporter Yu Je-hoon] During the period of interest rate hikes, financial consumers are focused on the ‘optimal timing’ to minimize interest expenses from loans and maximize interest income from savings and time deposits. Experts advise allowing some time flexibility for loans aimed at asset investments such as real estate, while for savings and time deposit products intended for interest income, it is recommended to operate with short maturities for the time being and observe the trend of interest rate policies around the fourth quarter.

According to the financial sector on the 30th, the U.S. Federal Reserve (Fed) implemented a so-called ‘giant step’ by raising the benchmark interest rate by 75 basis points (1bp=0.01%) at the Federal Open Market Committee (FOMC) meeting this month, strengthening expectations that the Bank of Korea will also accelerate its benchmark rate hikes. Since a rate inversion between Korea and the U.S. could lead to capital outflows, it is forecasted that the Bank of Korea will gradually raise the interest rate level until the end of the year, starting with a 50bp hike (‘big step’) next month.

Accordingly, year-end benchmark interest rate forecasts in the financial investment industry are also being revised upward. Samsung Securities recently raised its year-end benchmark rate forecast from 2.50% to 2.75%, an increase of 25bp, in a report. Kim Ji-man, a researcher at Samsung Securities, said, "Previously, we expected a 50bp hike by the end of the year and a 75bp hike by the first quarter of next year, but now we forecast a 100bp hike by the end of the year," adding, "There will be a big step in July, followed by 25bp hikes each in August and October."

Some even predict interest rates above the market consensus of 2.75%. JP Morgan raised its year-end benchmark rate forecast from 2.75% to 3.00%, a 25bp increase. JP Morgan expects the Bank of Korea to implement a big step next month, followed by consecutive 25bp hikes in August, October, and November, pushing the year-end rate to 3%. Furthermore, they anticipate the benchmark rate to rise to 3.25% with additional hikes next year.

With the prospect of interest rates reaching the 3% range for the first time in 10 years, financial consumers are facing deeper concerns. They are wondering at what point they should enter savings and time deposit products to increase interest income even by 0.1 percentage points (p), and at what point they should execute loans to minimize interest expenses.

Experts advise that loans for assets such as real estate should be approached with some time flexibility. Although interest rates are expected to continue rising until at least the end of the year regardless of the magnitude of hikes, the direction of interest rate policy may change depending on the severity of the economic recession thereafter. For savings and time deposit products, it is recommended to maximize interest gains by operating with short cycles of about three months for the time being. It is not too late to decide on long-term products of 12 months or more after observing the so-called giant step and big step situations forecasted for the third quarter.

Choi Jae-san, head of the PB team at Shinhan PWM Yeouido Center, said, "Since the direction of interest rate policy may change depending on the severity of the economic recession around the end of the year, if it is not an urgent situation, it is important to observe the trend after the end of the year before taking out new loans," adding, "Regarding savings and time deposits, since the magnitude of benchmark rate hikes is expected to decrease after September to October, it is advisable to operate products with short cycles of 3 to 4 months for the time being, and then consider subscribing to products with maturities of 6 or 12 months or more afterwards."

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