It’s been a month since the base interest rate was cut, and bank mortgage interest rates have risen.
Concerns over monetary policy effectiveness… “Corporate loan interest rates fall”
Even though a month has passed since last month’s base rate cut, bank household loan interest rates have not gone down, but rather continue to rise.
As a result, it has been pointed out that the effect of the change in monetary policy direction (pivot) decided at best may not be effective, but the Bank of Korea has clearly stated that this is not the case.
According to the Bank of Korea on the 12th, household loans from domestic banks increased by 3.9 trillion won last month, down 1.7 trillion won from a month ago (5.6 trillion won).
This can be interpreted as the fact that the lending threshold has risen due to the government’s strengthening of regulations for managing household loans, and banks have been increasing their additional interest rates one after another in recognition of the government’s efforts to manage loans.
On the 11th of last month, the Bank of Korea’s Monetary Policy Committee lowered the base interest rate by 0.25 percentage points (p) to 3.25% per annum, shifting the tight monetary policy stance that had lasted for over three years toward easing.
However, even though a month has passed since the policy change, the upper and lower fixed interest rates for home mortgage loans of the five major commercial banks (as of the 8th) are known to be slightly higher by 0.03%p compared to the previous month.
Households that have difficulty feeling the base interest rate cut at bank loan counters may have doubts about the effectiveness of monetary policy.
In addition, a ‘balloon effect’ occurred in which demand for loans was pushed to the non-banking sector to avoid strengthened regulations and increases in additional interest rates, and based on the entire financial sector, the scale of increase in household loans in October actually increased compared to the previous month (KRW 5.3 trillion → KRW 6.6 trillion). I also did it.
Questions may be raised as to whether the government’s policy combination is working as intended.
The Bank of Korea gave an answer to this question at the October financial market trend briefing held the previous day.
Park Min-cheol, deputy director of the market management team at the Bank of Korea’s Financial Markets Department, said, “There are concerns about the effect of the policy (regarding the rise in loan interest rates), but market interest rates do not mechanically move in response to base rate cuts.”
Deputy Director Park explained, “Unlike long-term interest rates, short-term interest rates, which are more closely linked to the base rate, are falling after the base rate cut,” adding, “Loan interest rates linked to them are also falling, mainly for corporate loans.” At the same time, he requested, “I hope you will look at and evaluate these aspects from an overall long-term perspective.”
Although the effect of the base rate cut is slower than the public’s expectations, it has been mainly reflected in short-term interest rates since last month, and if the perspective is broadened to a longer period from the beginning of this year rather than the past few months, this can be interpreted to mean that it is smoothly spreading to market interest rates. It happens.
In fact, Choi Yong-hoon, Director of the Bank of Korea’s Financial Markets Department, said on the Bank of Korea’s blog on the 30th of last month, “The news that banks are raising lending rates even though the base rate has been lowered has raised concerns about the effectiveness of monetary policy in some quarters, but the lending interest rate is in advance of expectations of a base rate cut. “As it has fallen significantly and is expected to fall further in the future, this cut in the base interest rate is assessed to be spreading more smoothly to lending rates than ever before,” he emphasized.
Director Choi predicted that the effect of easing people’s interest burden will gradually become more evident.
As a result of the Bank of Korea’s analysis, the loan interest rate based on the balance, which shows the burden of interest repayment on loan borrowers, decreased by -0.30%p for household loans and -0.37%p for corporate loans from the beginning of this year to August. In terms of interest burden reduction, it was estimated at 2.7 trillion won and 4.9 trillion won per year, respectively.
Director Choi expected, “As interest rates for new loans fall further in the future and existing loans are refinanced or the interest rate renewal cycle for variable rate loans arrives, the effect of reducing the interest burden will gradually increase.”
Rather, Director Choi added that from the perspective of stable monetary policy operation, a gradual spread like the current effect is preferable rather than a rapid reflection of the effect of the base interest rate cut.
(Seoul = News 1)
Time.news Interview: Navigating the Aftermath of Rate Cuts with Dr. Kim So-yeon, Financial Policy Expert
Time.news Editor: Welcome, Dr. Kim. Thanks for joining us today to discuss the recent shifts in the monetary landscape following the Bank of Korea’s base interest rate cut. It’s been a month since the rate was lowered, yet we’re seeing an increase in household loan interest rates. What’s your take on this situation?
Dr. Kim So-yeon: Thank you for having me. It’s indeed a perplexing scenario. A decrease in the base interest rate typically signals lower borrowing costs for households, yet the opposite seems to be happening. This can be attributed to a combination of regulatory changes and market responses that haven’t aligned with the Bank of Korea’s intentions.
Time.news Editor: Interesting point. The article mentions that the government has implemented stricter regulations on household loans, which might be contributing to this rise in lending thresholds. Can you elaborate on how regulatory measures impact interest rates in this context?
Dr. Kim So-yeon: Certainly. When regulations tighten, lenders often perceive an increased risk associated with household loans. As a result, they might raise their interest rates to safeguard against potential defaults, despite a lower base rate. This creates a paradox where the intent of easing monetary policy to stimulate borrowing is undercut by precautionary measures from banks responding to perceived risks.
Time.news Editor: So, it appears that while the base interest rate cut intended to alleviate financial pressure on households, banks are reacting in the opposite manner due to regulatory pressures. What are your thoughts on the Bank of Korea’s assertion that short-term interest rates are decreasing in response to the base rate cut?
Dr. Kim So-yeon: Deputy Director Park’s comments highlight a critical differentiation between short-term and long-term interest rates. While short-term rates may be declining, it’s essential to recognize that the rates connected to household loans often reflect longer-term risks, leading to a discrepancy. Therefore, while the base rate cut may influence short-term lending rates, the same doesn’t automatically apply to household mortgages, which remain under pressure from market sentiment.
Time.news Editor: It’s certainly complex. The article also mentions a ‘balloon effect,’ where borrowers are shifting their demand toward non-bank financial sectors to escape stringent regulations. How significant is this trend and what implications does it have for the overall financial system?
Dr. Kim So-yeon: This ‘balloon effect’ can pose serious risks to financial stability. As households seek loans from non-banking sectors, potentially less regulated environments, they might encounter higher costs and less oversight. While this might provide immediate relief, it can lead to an increased risk of over-leveraging, which can ultimately strain the financial sector if borrowers struggle with repayments.
Time.news Editor: It sounds like the situation warrants a careful analysis going forward. In light of these developments, how should the government and the Bank of Korea adapt their strategies to ensure that monetary policies effectively stimulate borrowing while managing risks?
Dr. Kim So-yeon: It’s crucial for policymakers to enhance communication and transparency regarding the goals and anticipated outcomes of monetary policy changes. Additionally, they may need to reassess regulatory frameworks to ensure they don’t inadvertently stifle the benefits of rate cuts. A balanced approach that fosters responsible lending while protecting consumers and maintaining financial stability will be key to navigating these challenges successfully.
Time.news Editor: Thank you, Dr. Kim, for sharing your insights. It’s clear that while the monetary policy shift was a step toward easing financial pressures, the interplay between regulations, market responses, and borrower behavior is leaving many questions unanswered. We appreciate your expertise on this subject.
Dr. Kim So-yeon: Thank you for having me. It’s a challenging yet fascinating time for financial policy in Korea, and I look forward to seeing how these dynamics evolve.