Following the Bank of Korea’s surprise cut in base interest rate last week, local banks have each been slashing their own rates on deposit and saving accounts.

Citibank Korea’s easy-access deposit account for corporate clients has fallen to the negative return territory after the bank slashed its annual interest rate to 0.001 percent from 0.1 percent on Tuesday. This means that a deposit of 10 million won ($8527) earns 1,000 won a year in interest or 846 won after tax. Given that inflation has remained at around 1 percent this year, the deposit faces erosion in its value of money. 


Rock-bottom deposit rates have been the norm for the past several months, but they are likely to dip into the negative territory when adjusted for inflation, said Jang Hwa-tak, an analyst at Dongbu Securities in Seoul.

“Given the central bank’s slashing of the base rate to a new record low of 1.25 percent, real deposit rates could turn negative after summer,” he said.

The BOK on June 9 lowered the seven-day repurchase rate by 0.25 percent to 1.25 percent -- its first reduction in 12 months.

This week, Kookmin Bank, one of Korea’s largest commercial banks, joined rivals in lowering the rates it pays on deposits and savings. Its flagship savings account now carries 0.7 to 1.2 percent of annual interest, down 0.2 percentage point. Earlier, KEB Hana Bank had announced a maximum 0.3 percentage point cut and Woori Bank a 0.05 to 0.25 percentage point reduction. More banks are expected to follow suit.

“The abysmal interest rates will lead to a change in Koreans’ fund portfolio from bank savings to investment vehicles,” Jang said. In 2001, when bank interest rates fell to the negative territory, the Korean savings rate had plunged, he noted.

As of the end of 2015, bank deposits accounted for 43.1 percent of financial assets.

By Lee Sun-young (milaya@heraldcorp.com)