Banks’ Additional Cut of Interest rates on Deposits

As banks’ average interest rate on deposits has already fallen to an annual rate of 3 %, most banks are set to reduce interest rates on fixed accounts. As a result, a "minus interest rate era" is likely to arrive sooner or later. The average rate on deposits was 3.97 % last December. However, considering the 16.5% tax on interest income and the inflation rate of 3 %, the real rate is only 0.3%.

According to the Bank of Korea and the banking system, Jan. 28, Kookmin Bank has decided to reduce its one-year fixed account rate by 0.15 percentage point, from 4.75 % to 4.6% and other commercial banks are taking similar action.

Shinhan Bank, which already decreased its one-year fixed account rate by 0.1 percentage point on Jan. 6, has decided to cut the rate additionally, and Korea First Bank reduced the rate of "First Fixed Account," which matures in one year, to 4.9% from 5.0% on Jan. 24.

An official with Shinhan Bank said, "This is the first time that the rate on fixed accounts fall below the 5% mark. The rate dropped below 6% in August 2001, and fell again below 5% 17 months later."

Kookmin Bank’s nominal interest rate on one-year fixed account is 4.6%. After the 16.5 % interest tax and the inflation rate of 3 %, however, the real rate is only 0. 841 %.

If you deposit 100 million won for one year, you can get a total interest of 841,000 won, a mere 70,000 won every month.

The central bank explains because many banks suffer difficulties in money management and the Korea Deposit Insurance Corporation has banks make special premium payments, most banks have decided to reduce interest rates on deposits.

Last December, the average rate on fixed accounts dropped from 4.73 % to 4.71 %, the rate on installment savings accounts from 5.13 % to 5.09 %, the rate on savings accounts from 1.34 % to 1.31 %.

Banks’ loan rates were also cut by 0.07 percentage point, from 6.72 % to 6.65 % as retail loans and wholesale loans to conglomerates dropped.

Against this backdrop, banks cannot but cut interest rates on deposits to maintain a certain gap between the rates of deposits and loan rates, and minus interest rates look highly likely.

Kwu-Jin Lim Chi-Young Shin mhjh22@donga.com higgledy@donga.com