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Real Interest Rate Dips to Zero

Posted August. 07, 2008 06:23,   


The country is witnessing an era of the “minus real interest rate,” where customers are unlikely to benefit from putting their money in a bank due to rising inflation.

The average bank interest rate recorded a relatively high five percent, but the real interest rate fell to zero for the first time in 43 months due to rapid inflation.

The National Statistical Office and the Bank of Korea said yesterday that the real interest rate – or the nominal interest rate minus the rate of inflation -- of commercial banks was zero percent in June. Consumer inflation in June was 5.5 percent, offsetting the average interest rate on deposits of 5.5 percent.

The interest rate adjusted for inflation fell into negative territory. For the first time in 41 months, consumer inflation last month rose as high as the average interest rate on deposits.

The real interest rate in August last year was three percent but fell to 2.3 percent in October. It remained in the one-percent range between February and April this year and dropped to 0.5 percent in May.

Since consumer inflation rose to 5.9 percent last month, the real interest rate will drop further if the central bank’s Monetary Policy Committee freezes the benchmark interest rate in a meeting today.

For this reason, the financial market is closely watching the committee. An interest rate hike could stabilize prices and normalize the real interest rate.

Shin Min-yeong, a researcher at LG Economic Research Institute, said, “Surging oil prices have sent prices up, but the main reason for the zero real interest rate is that the central bank cannot raise interest rates for fear of an economic downturn.”

“If the situation remains unchanged, decrease in deposits will compromise the capital distribution function at commercial banks and aggravate inflation.”

In the face of a worsening financial situation and the bearish stock market, a slew of banks are trying to attract more financial capital with high interest rate products.

Korea Exchange Bank announced a high-yield deposit product with annual interest of 6.28 percent from July 28 and has sold about 260 billion won worth of the product.

Hana Bank is offering a deposit account with fixed interest of 7.1 percent when purchasing an equity-linked deposit.

The National Federation of Fisheries Cooperative is selling a product providing 6.5 percent interest for a one-year maturing fixed deposit by the end of August.

Ever Green Mutual Savings Bank has raised its rate for time deposits exceeding one year to 6.8 percent. That at Solomon Savings Bank for the same type of product is 6.85 percent.

parky@donga.com crystal@donga.com