Record-low interest rates leading to weak deposit rates of Korean banks

[THE INVESTOR] With the Bank of Korea reducing its policy rate to a record low of 1.5 percent, interest rates paid by local banks have dropped to zero percent, which could mean negative returns on bank deposits when adjusted for price inflation, according to market observers on June 15.

According to the observers, Citibank Korea has cut the annual interest rate on its savings accounts for companies to 0.01 percent from 0.1 percent.

A 0.01 percent interest rate submits 1,000 won ($0.85) per year in interest on every 10 million won in savings, but the actual return sums up to 846 won after shedding tax.

However, the final return is forecasted to be an overall loss due to the fact that price increases have been circulating at around 1 percent this year.

Various financial options have surfaced for South Korean consumers since June 2015 when the central bank started to maintain its record-low key interest rate of 1.5 percent. They can choose whether to save their money in a bank account, invest or spend it.

BOK went further, cutting the key rate to 1.25 percent this month, which resulted in local banks following the pattern.

Top commercial lender Woori Bank followed suit by reducing its interest rates on deposits by up to 25 basis points or 0.25 percentage point, while KEB Hana Bank also lowered its rates by the same yardstick.

Consumers have been recommended by market observers to consider investments in low-risk funds instead of stashing the money away in bank accounts which is less beneficial in returns compared to holding the money in cash.

Due to higher yields, consumers are leaving main commercial banks to register as customers of other financial institutions. These institutions such as savings bank or asset management firms hold more risks, but offer higher yields.

Deposits stored in nonbank financial institutions rose to 2,022.15 trillion won, a 5.8 percent or 111 trillion won hike from 1,911.1 trillion won last December. The BOK said that this is the first time in the country’s financial history that such deposits have passed the 2,000 trillion mark.

(theinvestor@heraldcorp.com)