The Bank of Korea: "Korean Monetary Policy Smoothly Transmits to Deposit and Loan Rates Compared to Major Countries"

Lee Chang-yong, Governor of the Bank of Korea, is attending the 2023 BOK International Conference held on the morning of the 1st at the Bank of Korea Annex in Jung-gu, Seoul, with the theme "Policy Challenges After the Pandemic," engaging in a policy discussion. Photo by Joint Press Corps

The Bank of Korea explained that, contrary to some claims that the effect of monetary policy has weakened due to lower lending and deposit interest rates despite the base rate hike, "compared to major countries, Korea's base rate increase has been smoothly transmitted to lending and deposit interest rates."

The Bank of Korea stated this in the 'Review of the Transmission Effect of Policy Rate Hikes on Lending and Deposit Rates in Major Countries' section of the Monetary and Credit Policy Report released on the 8th.

According to the Bank of Korea, even after the tightening monetary policy raised the base rate to 3.50% per annum, expectations that domestic and international tightening had peaked spread, leading lending and deposit rates to show a gradual decline as of April, with loan rates at 5.01% and deposit rates at 3.43%.

As lending and deposit rates and market interest rates moved inversely to the base rate, some in the market analyzed that the Bank of Korea's monetary policy aimed at price stability was not functioning properly.

However, the Bank of Korea explained that the transmission rate of lending and deposit interest rates in Korea was above average compared to major countries.

First, examining the transmission effect of base rate hikes on lending and deposit rates based on new transaction amounts, policy rate hikes in major countries transmitted to lending and deposit rates at an average of 72?91%. The average transmission rates by type of lending and deposit were 71.8% for household loans, 91.3% for corporate loans, and 73.3% for time deposits.

In Korea, the transmission rate for time deposits was 90.3%, higher than the major countries' average (73.3%), while the transmission rates for household loans and corporate loans (69.0%, 86.0%) were slightly below the major countries' averages.

The Bank of Korea stated, "Korea's transmission rate of new lending and deposit interest rates was at the average level of major countries, showing the highest level in the early phase of the rate hike and declining as the period progressed."

The transmission rates of new lending and deposit interest rates in major countries also rose initially due to market interest rate increases driven by expectations of additional hikes, then declined toward the later stages of the rate hike period. In most cases, the transmission rate exceeded 100% within three months of the initial rate hike, reaching a peak before gradually decreasing.

Based on outstanding balances, policy rate hikes in major countries transmitted to lending and deposit rates at an average of 21?69%, with average transmission rates by type of lending and deposit showing significant differences: 37.2% for household loans, 68.7% for corporate loans, and 20.5% for savings deposits.

In Korea, the transmission rates for household loans and corporate loans were 75.7% and 80.7%, respectively, and 60.3% for savings deposits. All of these significantly exceeded the major countries' averages.

The Bank of Korea explained, "Korea's transmission rate of lending and deposit interest rates based on outstanding balances was higher than the major countries' average and rose faster, influenced by the high proportion of variable-rate loans."

By country, loan interest rates showed relatively higher transmission rates where the proportion of variable-rate loans was high, and deposit interest rates showed relatively higher transmission rates where the proportion of time deposits was high.

[Image source=Yonhap News]

During this rate hike period, the lending and deposit interest rate spreads based on new transaction amounts in major countries showed differentiated patterns depending on each country's bank funding and operation conditions, government regulations, and other factors.

Germany and France saw a narrowing of lending and deposit interest rate spreads, while Italy, Spain, and Denmark experienced widening spreads. Based on outstanding balances, spreads generally widened except in France.

Korea's lending and deposit interest rate spread narrowed based on new transaction amounts but showed a typical widening pattern based on outstanding balances. The new transaction amount-based spread narrowed by -0.26 percentage points, smaller than the similar pattern seen in Germany and France (-0.48 percentage points on average), and the outstanding balance-based widening was 0.54 percentage points, smaller than the major countries' average of 0.73 percentage points.

Through this analysis, the Bank of Korea stated, "Compared to major countries, Korea's base rate hike is evaluated to have been smoothly transmitted to lending and deposit interest rates."

Korea's transmission rate of lending and deposit interest rates is at the major countries' average level based on new transaction amounts and significantly exceeds the major countries' average based on outstanding balances.

The Bank of Korea explained, "As the end of the rate hike period approaches, the transmission rate of lending and deposit interest rates may further narrow. However, if credit risk is highlighted due to financial market instability and delinquency rates rise rapidly, there is a possibility that the transmission rate could expand again."

It added, "Therefore, it is necessary to carefully monitor the future trends of lending and deposit interest rates, changes in risk factors, and the resulting changes in borrowers' interest burdens, loan demand, and fund flows."

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