Rate Roulette: How Interest Rate Cuts Are Paradoxically Fueling Higher Loan Interest Rates

Commercial banks are lowering their deposit and savings interest rates one after another to reflect the Bank of Korea’s base interest rate cut. Following Woori Bank and NH Nonghyup Bank lowering their deposit and savings interest rates by 0.2 to 0.5 percentage points, Hana Bank lowered its deposit product interest rates by 0.05 to 0.25 percentage points from the 1st. Other banks that have been paying attention are expected to join in the near future. On the other hand, despite the base interest rate cut, bank lending interest rates are rising in reverse. Mortgage loan interest rates at major commercial banks all jumped by up to 0.1 percentage points compared to just before the Bank of Korea’s base rate cut.

This is because banks are still raising lending interest rates by raising additional interest rates or eliminating preferential interest rates in response to pressure from financial authorities to curb the increase in household debt. Between July and October alone, commercial banks raised lending interest rates nearly 30 times. Usually, when an interest rate is cut, the loan interest rate falls faster than the deposit interest rate, deteriorating the profitability of banks, but this time, the deposit margin (difference between deposit and loan interest rates) widens further, creating an environment in which bank profits can increase.

The cause of this strange phenomenon is largely due to the influence of real estate and loan policies that go back and forth between hot and cold baths. This year, the government released a large number of low-interest policy loans such as stepping stone loans and special loans for newborns, encouraging the increase in home mortgage loans. The regulation to strengthen the debt service ratio (DSR) was also suddenly postponed, and then began tightening loans later as household loans exploded. Under pressure from the authorities, banks have changed their lending regulations more than 20 times by reducing loan limits and maturities in addition to raising interest rates. Banks used the authorities as a shield and began lending money at higher interest rates to borrowers with good credit conditions.

Even with the interest rate cut, the interest burden on the common people and the self-employed is increasing, becoming a factor delaying the recovery of domestic demand. The government’s clumsy policies should not be repeated, enriching banks and making financial consumers miserable. Sophisticated policies must also be supported to block the balloon effect of loans flowing to secondary financial institutions with relatively loose regulations.

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