[Reverse Market Interest Rates] ① Base Rate Rises but Bank Interest Rates Fall Back

Financial Authorities' Intervention and Market Volatility
Despite BOK Raising Base Rate, Bank Interest Rates Remain Unstable

On the 13th, when the Bank of Korea decided to raise the base interest rate by 0.25 percentage points at the first monetary policy meeting of the new year, Woori Bank lowered its upper limit interest rate by 0.7 percentage points. The variable interest rate on mortgage loans, which had been 7.31~8.11% until the previous day, dropped to 6.41~7.41% on that day.

Woori Bank is not the only one lowering loan interest rates. NH Nonghyup Bank will reduce the variable mortgage loan interest rate by up to 0.8 percentage points starting from the 20th of this month. With this measure, the rate that had exceeded 7% will fall to the low 6% range. Shinhan Bank and Hana Bank also slightly lowered their loan interest rates earlier this month.

A representative from Bank A said, "Not only mortgage loans but also jeonse loans and credit loans are seeing interest rate reductions, and even internet banks are joining this trend," adding, "If anyone needs a loan, they should carefully watch the interest rate decline movements by each bank from now on."

Deposit interest rates have also fallen by nearly 1 percentage point in a month. The five major banks’ fixed deposits, which had been approaching 5%, are now in the 3% range (NH All One e at 3.88% on the 12th) or barely above 4% (Kookmin Super at 4.01%, Shinhan Solpyeonhan 1-year at 4.0%). After the Bank of Korea’s recent rate hike, some banks are considering raising deposit or installment savings rates, but the banking sector expects these increases to be minimal.

A representative from Bank B said, "Right after the Bank of Korea raised the base rate in January last year, banks could not raise deposit or installment savings rates due to the authorities’ warning to refrain from excessive competition for deposits," adding, "With the base rate having been raised twice consecutively, it is hard to ignore it, but the increase will likely be slight."

Pressure to Lower Loan Rates for Yeongkkeuljok? Market Distortions May Occur

▲At the Monetary Policy Direction Meeting of the Bank of Korea held on the 13th, Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel.

Although the Bank of Korea’s base rate hike trend continues, market interest rates are fluctuating unpredictably. The main causes are the strong government-controlled financial policy since the second half of last year and the extreme volatility in the capital market following the Legoland incident. Kim Kyung-soo, emeritus professor of economics at Sungkyunkwan University, said, "When market interest rates and base rates move separately, market distortions can occur."

Throughout last year, financial authorities pressured banks to lower loan interest rates. When the widening gap between deposit and loan interest rates was detected early this year, the Financial Supervisory Service immediately launched an investigation. At that time, Lee Bok-hyun, head of the Financial Supervisory Service, said, "During a period of rising interest rates, banks should not excessively raise loan interest rates beyond market interest rates or borrowers’ creditworthiness."

It usually takes about three months for base rate hikes to be reflected in loan interest rates, but with ongoing government monitoring and supervision, the extent of the impact remains uncertain. Kim Sang-bong, professor of economics at Hansung University, said, "If the base rate rises to around 4% this year, banks will add their margins, so loan interest rates will inevitably exceed 6~7% at minimum," adding, "We need to consider whether the policy logic of 'lowering loan rates because Yeongkkeuljok (those who borrow to the limit) are struggling' is appropriate."

Professor Kim said, "As loan interest rates rise and housing prices fall, the housing prices that more than doubled during the Moon Jae-in administration will normalize, and those without homes will have a chance to own a house." Experts emphasize that allowing market interest rates to rise along with the base rate hike is necessary to control inflation.

Deposit Interest Rates Overshot and Are Now Falling

The decline in deposit interest rates was influenced simultaneously by regulatory pressure and the bond market. In October and November last year, right after the Legoland incident, the bond market tightened, and the 1-year AAA-rated bank bond interest rate surged to 5.017% in November. As bond interest rates rose, deposit interest rates at commercial banks also followed suit. With financial authorities requesting banks to refrain from issuing bank bonds, banks’ funding sources became limited to deposits and installment savings, causing deposit interest rates to fluctuate more. This was also when 5% fixed deposit products appeared at commercial banks.

However, this trend soon subsided. Authorities put a brake on deposit competition, saying commercial banks were absorbing too much funds. This explains why deposit interest rates fell after the base rate hike in November. As bond market stabilization measures were introduced, bank bond interest rates began to decline. The 1-year bank bond rate stood at 3.954% as of the 12th (average of Korea Asset Pricing, NICE P&I, and KIS Bond Evaluation), the lowest since September 21 last year (3.934%).

With bank bond rates falling, banks no longer need to attract deposits with high interest rates. A senior official from the Financial Services Commission said, "Deposit interest rates overshot in the second half of last year and are now returning to their original levels."

The financial sector anticipates that loan interest rates may be lowered once again after mid-month due to the decline in fixed deposit and bank bond interest rates. A representative from the Korea Federation of Banks said, "If the COFIX announced on the 16th reflects the recent deposit interest rate trends, loan interest rates could fall." COFIX (Cost of Funds Index) is the weighted average interest rate of funds raised by eight domestic banks through deposits, installment savings, and bank bonds, serving as the benchmark for variable mortgage loan interest rates. Loan interest rates move in tandem with changes in funding costs.

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