The Unmoving Loan Rate: A Post-rate Cut Analysis

Following the Bank of Korea’s (BOK) decision to lower the base interest rate by 0.25 percentage points on February 25th,the anticipated decrease in bank loan rates has failed to materialize. An analysis of five major South Korean banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup – reveals a negligible change in loan interest rates. as of april 2nd, rates ranged from 3.50% to 5.96% annually, a mere 0.03 percentage point increase at the lower end and a 0.01 percentage point decrease at the higher end compared to the rates on February 24th (3.47% to 5.97%). Similarly, fluctuating interest rates saw a slight increase, wiht the bottom rising by 0.09 percentage points and the top by 0.02 percentage points.

Deposit rates Plunge: A Contrasting Reality

In stark contrast to the stability of loan rates, bank deposit rates have experienced a significant decline. the average interest rate for 12-month deposits across the five major banks now sits between 2.85% and 3.10% annually, including preferential rates. This represents a decrease of 0.10 percentage points at the lower end and 0.20 percentage points at the higher end compared to the rates offered on February 24th (2.95% – 3.30%).This disparity raises questions about the transmission mechanism of monetary policy and its impact on consumers.

Decoding the Rate Calculation: A Complex Formula

Understanding the dynamics of loan interest rates requires a grasp of the underlying calculation. These rates are typically determined by a formula that includes a base rate (often tied to market interest rates),an additional interest rate (reflecting bank operating costs and profit margins),and preferential interest rates (offered to high-income or high-credit borrowers).The inertia in loan rates can be attributed to the fact that fixed-rate loans are not instantly impacted by base rate changes.

The five-year financial bond yield, frequently enough used as a fixed-rate benchmark, stood at 2.97% on April 1st, a marginal decrease of 0.01 percentage points from February 24th (2.98%). This minimal change further explains the lack of movement in fixed-rate loan products.

Political Uncertainty and Market Volatility

Beyond purely economic factors, political uncertainty is playing a significant role in dampening the impact of the BOK’s rate cut. As one bond market analyst noted, The political uncertainty… has offset the downward pressure from interest rates. This suggests that investor sentiment is being influenced by broader political considerations, leading to a cautious approach in the debt market.

COFIX and the Cost of Funding

Another crucial element influencing loan rates is the Cost of funds Index (COFIX), which reflects the cost of financing for banks. while the March COFIX rate (2.97%) decreased by 0.11 percentage points from the previous month,its impact on loan rates is expected to be gradual. COFIX reflects the cost of financing banks, a commercial bank official stated, highlighting the lag between deposit rate adjustments and loan rate adjustments.

regulatory Scrutiny and Household Lending

Adding another layer of complexity, financial authorities are maintaining strict oversight of household lending. After a concerning surge of 3.93 trillion won in February, following a decrease of 4.762 trillion won in January, household loan growth slowed to 1.799 trillion won in march. Though, concerns remain, especially with the recent lifting of land transaction permit system in Seoul, which could fuel increased borrowing activity.

Lee Bok-hyun,Director of the Financial Supervisory Service,acknowledged that affected house prices and the short-term surge in trading volume in some parts of the metropolitan area are gradually reflected in household loans since late March. this suggests that regulators are closely monitoring the situation and might potentially be hesitant to ease lending conditions.

Moreover, the spring moving season traditionally sees increased demand for loans, possibly exacerbating the situation. As a senior financial sector official noted, The financial authorities’ eyes are hard to reduce loan interest rates.

Looking Ahead: Implications for Borrowers and the economy

The current stagnation in loan rates,coupled with declining deposit rates,presents a challenging environment for borrowers and savers alike. While the BOK’s rate cut was intended to stimulate economic activity, its impact is being muted by a confluence of factors, including regulatory pressures, political uncertainty, and market dynamics. As South Korea navigates these complexities, close monitoring of household debt levels and market sentiment will be crucial to ensuring financial stability and enduring economic growth.