Perplexed by the Bank of Korea’s drastic decision to lower the key policy rate to a record low 1.5 percent, major banks are rushing to lower the rate of their deposit and installment savings accounts accordingly.
The impact of the key rate cut hit hard on the market, as the central bank had recently hinted at a status quo, projecting an optimistic forecast on the nation’s economy ― until the recent breakout of the Middle East respiratory syndrome.
NH NongHyup Bank, affiliated with the nation’s agricultural cooperative, is to reduce its rates next week, officials said Friday.
The detailed range of reduction is yet to be decided but the receiving rate is likely to fall by 0.25 percentage points or more, in which case the fixed deposit rate will go down as low as 1.3 percent per annum.
Considering that the inflation rate will hang around 0.9 percent, according to the BOK forecast, the actual rate level for depositors is to verge on zero.
Other banks such as Shinhan, KB Kookmin, Hana and Woori also indicate that they would follow suit, after keeping watch on the market for a while.
The most immediate challenge for the banking industry is the rapid decrease of net interest margin, which currently accounts for over 90 percent of their profits.
The average net interest margin of domestic banks as of the end of the first quarter was 1.63 percent, which was already the lowest ever.
According to a report by the Woori Financial Research Institute, the level of NIM would drop by 0.7-0.8 percent for every 0.25 percentage points in the key policy rate.
Based on this, the think tank predicted that the industry’s top four banks ― KB Kookmin, Shinhan, Woori and Hana ― will lose between 276 billion won ($249 million) and 685 billion won in NIM this year.
The BOK’s monetary policy committee had announced Thursday that it will cut the base rate by another quarter percent from the previous 1.75 percent.
This was the fourth rate cut since last August, which brought down the figure by a total of 1 percentage point in less than a year. It was also a more drastic action than expected as the central bank was hesitant to drop the rate any further with the U.S. Federal Reserve‘s incoming rate hike.
The negative impact that the spread of MERS had on the economy was the key reason for the decision, BOK Gov. Lee Ju-yeol said.
By Bae Hyun-jung (
tellme@heraldcorp.com)
