Zero percent interest era on the way

Major lenders rush to cut interest rates amid deepening slump

By Lee Min-hyung

Major commercial banks are rushing to cut interest rates on savings accounts, in a pre-emptive attempt to tackle their worsening business environment due to the prolonged economic slump and toughened government regulations.

Shinhan Bank plans to cut its interest rate on all checking accounts to 0.1 percent from March 21. The bank also decided to reduce annual interest rates of two installment savings products by 0.25 percentage points to 1.25 percent

Other lenders have also recently cut the interest rate on some of their deposit accounts. KB Kookmin Bank lowered the interest rate for its KB Super Regular Savings Deposit account by 0.1 percentage points.

Woori Bank also followed suit by pushing ahead with interest rate cuts on some of its deposit savings accounts.

NongHyup Bank was one of the first to initiate the new interest rate changes with cuts to some of its major savings accounts of up to 0.3 percent points in December.

The decisions come because of the nation's years-long economic downturn. The weak outlook for a near-term economic rebound led the Bank of Korea (BOK) to cut its base interest rate to the record low level of 1.25 percent.

The central bank will decide whether to further cut the rate to 1 percent today when it holds its second rate-setting meeting of the year. Experts have remained poles apart over whether the BOK will maintain the status quo.

“If the central bank decides to cut the base interest rate further during the upcoming meeting, major commercial banks will speed up their drive to slash interest rates on savings accounts,” an official from one of major lenders here said.

“Even if the BOK keeps the key rate untouched, things will not change a lot for commercial banks due to the economic situation here,” the official said.

With such an unfavorable market environment showing little sign of improvement here, banks are reducing spending by cutting their deposit interest rates.

To make the matters worse, most lenders are facing growing setbacks in their loan business at a time when the government has announced an “all-out war” against real estate speculation. To stabilize soaring housing prices in Seoul and other satellite cities, the Moon Jae-in administration is implementing stricter loan sanctions.

This blocked lenders from generating more revenue from loan interest. Interest income, particularly from mortgages, tops the list of revenue sources for most commercial banks here. But as the government continues to introduce tougher measures to prevent individuals from receiving housing loans from the banks, some of them expect their profitability to decline in 2020, compared to a year ago.

Local lenders, therefore, are seeking to offset the potential damage by cutting the interest rate on customers' deposit accounts.

Under growing market uncertainty, Shinhan Bank cut its annual profit target in 2020 to less than 10 percent of that in 2019 when it reported 2.33 trillion won ($1.91 billion).