Banks` Interest Rates Fell to 3% for the First Time Ever

Average interests on savings at banks, such as regular savings, fell to 3% level per annum for the fist time in history. Accordingly, a saving of 100 million won at a bank incurs 17,500 won in damages every month considering the inflation and taxes.

According to the trends on aggregate interest rates on average for August in 2003, reported by the Bank of Korea (BOK) yesterday, average interest rates on savings went down 0.15% from July to 3.94% in August, based on the newly-open accounts.

If the low interest rate trend further continues, a person who deposits 100 million won at a bank will face a 210,100 won loss in his or her real interest income on a yearly basis when considering a 16.5% income tax on the interest income as well as a 3.5% price hikes.

Applying the year-low inflation rate of 3% in August, a 100 million won saving only generates 290,000 won in real interest gains per annum with a meager 24,000 won profit per month.

During August, overall interest rates beside the regular savings have fallen sharply : interest rates declined from 4.29% to 2.28% for regular-based installment deposits, from 4.21% to 4.14% for mutual savings account, from 4.12% to 3.90% for the Certificate of Deposits (CD), and from 3.94% to 3.73% for the Repurchase Agreement (RP). At the same time, average interest rates on new bank loans also dropped by 0.17% points to 6.03% in August, which have been on the decline for five months in a row since April of this year.

In particular, interest rates on corporate loans fell below 6.00% mark for the fist time ever by dropping from 6.14% to 5.99% due to shrinking demand for fund following the dwindling corporate investments.

Joong-Hyun Park sanjuck@donga.com