Base Rate Frozen Amidst Economic Uncertainty

The Bank of Korea’s Monetary Policy board (MPB) has elected to maintain the base interest rate at 2.75% at its meeting today. This decision to hold steady,following a previous rate decrease in February,reflects concerns surrounding the recent surge in the won-dollar exchange rate to ₩1,400,escalating household debt,and ongoing economic uncertainties in the United States.

While the base rate remains unchanged for now, Bank of Korea Governor Lee Chang-yong has signaled that a rate cut cycle is anticipated for the year. This statement was reinforced during a National assembly committee session, indicating a willingness to adjust monetary policy as needed.

Market Signals vs. Reality for Consumers

The bond market is already pricing in future rate cuts. The yield on five-year Korean treasury bonds, a benchmark for loan interest rates, recently hit a three-year low of 2.765% on April 16th, according to the Korea Financial Investment Association. This level hasn’t been seen since march 2022,suggesting strong market expectations for lower rates.

However, this optimism isn’t translating into lower borrowing costs for individuals. Data from the Korea Federation of Banks reveals that the average loan interest rate at five major banks (Kookmin, Shinhan, Hana, Woori, and NongHyup) stood at 4.38% last month, while the base rate was 2.99%.

A year prior, in March 2024, the average loan rate was 3.98% when the base rate was 3.86%. This comparison highlights a concerning trend: despite a nearly 1% decrease in the benchmark interest rate over the past year, the actual interest rates applied to consumer loans have, paradoxically, increased.

The Squeeze: Reduced Preferential Rates and Increased Additional Interest

The discrepancy stems from banks’ strategies to manage household loan growth, particularly since the latter half of last year. One key factor is the reduction of preferential interest rates, which are benefits offered to customers through credit card usage or salary account subscriptions. These preferential rates effectively lower the overall loan interest rate for eligible borrowers.

According to disclosures from the Korea Federation of Banks, the additional interest rate levied by the five major banks averaged 3.008% last month, a 0.24% increase compared to the 2.754% recorded during the same period last year. Conversely, the average preferential rate decreased by 1.03%p, falling from 2.636% to 1.605% over the same timeframe. This combination of higher additional interest and lower preferential rates effectively negates the impact of base rate cuts on consumer loan rates.

Some banks are even raising additional interest rates. For instance, IM Bank recently increased interest rates on its main loan products by 0.3%p, affecting variable, mixed, and fixed-rate loans. similarly, BNK Kyongnam Bank has raised interest rates on its six-month variable-rate loan products.

Deposit Rates Fall, Widening the Interest Rate Margin

While loan rates remain stubbornly high, banks are actively lowering deposit rates, citing the need to reflect declining market interest rates. Woori Bank, for example, reduced the basic interest rates on 19 deposit products on april 15th. Interest rates on representative regular deposits (terms of less than one or two years) were lowered from 2.35% to 2.15% per year, while rates on “Our Super Regular Deposits” (terms of less than six months) were reduced from 2.55% to 2.30%.

Other institutions, including state-owned IBK Industrial bank and KDB Industrial Bank, have also lowered deposit and savings rates by 0.1-0.5%p and 0.1-0.15%p, respectively. Internet-only banks like K Bank and Toss Bank have followed suit with thier own interest rate cuts.

This divergence between loan and deposit rates is widening the “interest rate spread,” which directly impacts bank profitability. As of February, the average household interest rate spread (excluding policy-backed loans) stood at 1.38%p, the largest gap since July 2022, when the Banking Association began tracking this statistic. If this trend continues, the interest rate spread is projected to widen for the eighth consecutive month in March.

The current situation highlights a growing disconnect between monetary policy and its impact on everyday consumers.
Economic Analyst, archynetys Research