Switching Even 4% Range Deposits... Observing with Parking Accounts [New Interest Rate Nomad⑦]

[Asia Economy Reporter Yoo Je-hoon] Lee Mo (37), an office worker living in the Seoul metropolitan area, canceled a fixed deposit product with an annual interest rate of 4.1% (12-month maturity) about three months ago and switched to a special deposit product offered by a mutual finance institution with an annual interest rate of 5.8%. Although he forfeited the accumulated interest upon cancellation, the rising interest rate levels made it more beneficial to terminate the previous deposit. Lee said, "Now that even commercial banks offer interest rates in the 4% range, I felt it was a loss to keep the old deposit."

Housewife Park Mo (39, female) was considering canceling a savings product with an annual interest rate of 3.2% (12-month maturity) that she subscribed to at the end of last year but decided to maintain it. Although many deposit products offer rates exceeding 5%, after calculating the profit and loss, she judged it better to keep the deposit. Park said, "When the maturity comes, I plan to put part of the amount into a demand deposit account (parking account)."

With the Bank of Korea's continuous base rate hikes, the interest rates on fixed deposits and savings accounts at commercial banks and mutual finance institutions have approached the 4-5% range, prompting interest rate nomads to busily calculate profits and losses. Some are canceling existing deposits to switch to products offering higher rates, while many others are maintaining a 'wait-and-see' stance, considering at least one or two more rate hikes expected by early next year.

According to the Bank of Korea's "Financial Market Trends in September 2022" released on the 14th, as of the end of September, the deposit balance at deposit banks increased by KRW 36.4 trillion from the previous month to KRW 2,245.4 trillion, about four times the previous month's increase of KRW 8.7 trillion. The increase in deposit balances was led by fixed deposits. The amount of fixed deposits at deposit banks increased by KRW 32.5 trillion in one month, about 1.5 times the previous month's KRW 21.2 trillion. This increase in fixed deposits is also the highest level since related statistics began in 2002.

The influx of funds into fixed deposits is due to the sharply rising deposit interest rates. With the base rate rising to 3%, commercial banks' deposit rates have surged to 4%, and mutual finance institutions to the 5% range. The special promotional rates offered by banks and mutual finance institutions are even higher. Fixed deposits with rates in the 5-6% range and savings products in the 7-8% range are not uncommon. A recent example is the special product launched by Hwayang Credit Cooperative. On the 12th, Hwayang Credit Cooperative released a "Fixed Savings with 8% Interest Rate (12-month maturity)" product, offering a base rate of 7.9% plus a 0.1 percentage point preferential rate for non-face-to-face subscriptions, totaling an annual interest rate of 8%, which sold out on the same day.

The interest rate nomads sensitive to market rates are considering switching deposits and savings products in this context. For example, if Mr. A maintains a previously subscribed deposit with an annual interest rate of 4.1% until maturity with a principal of KRW 10 million, the interest earned would be about KRW 346,000. However, switching to a deposit with a 5.8% rate would yield about KRW 368,000 in interest over the remaining nine months, which is actually higher.

Some have returned to a wait-and-see stance. With one more Bank of Korea Monetary Policy Committee meeting scheduled in November and expectations that the base rate will reach 3.50-3.75% by early next year, many anticipate further rate hikes within the year. Office worker Bae Mo (34) said, "At this pace, I think savings products with interest rates in the 10% range will appear by the end of the year or early next year without special preferential conditions," adding, "For now, I will save money in a parking account instead of a savings product and observe the trend before subscribing."

Commercial banks and mutual finance institutions are also employing various methods to attract customers who have adopted a wait-and-see stance. Toss, which caused a sensation with a 2.0% interest rate parking account, recently raised the parking account interest rate to 2.3% annually as competitors followed suit with rate hikes. Many savings banks offer parking account interest rates in the 3-3.3% range. As interest rates rise, revolving fixed deposit products are also appearing one after another. For example, SangSangIn Savings Bank recently launched the "369 Revolving Fixed Deposit," allowing customers to choose revolving periods of 3, 6, or 9 months. At initial subscription, interest rates of 4.00% for 3 months, 4.10% for 6 months, and 4.20% for 9 months are applied, and the interest rate is automatically renewed at the end of each cycle.

A representative from a commercial bank said, "The pace of interest rate increases is very fast, and to respond, each bank is quickly raising deposit interest rates, resulting in many customers inquiring about opening and closing deposit accounts," adding, "Some customers even complain about the rapidly changing rates within a day or two."

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