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Real interest rates below zero percent

Real interest has stayed below inflation for the past year, devaluing returns on bond investments and deposits at banks, a government report said Wednesday.

The interest rate on 1-year savings products at most commercial banks is just over 4 percent, leaving no room for profit given on-year inflation in the 4 percent range on top of a 15.4 percent tax on interest income.

“Real returns on deposits were in negative terrain since the Asian Financial Crisis of 1997-8 but I guess it worsened with heightened inflation pressure this year,” Oh Suk-tae, head economist at the SC First Bank, said.

The real interest rate ― the nominal interest rate minus inflation ― has stayed between minus 1 percent and minus 0.5 percent since September, aside from a quick swing to a positive return of 0.1 percent in November, Statistics Korea said.

Central banks of most nations have kept ultra-loose monetary policies to encourage more spending and investment, as opposed to savings, but economists say this has spurred inflation.

With April’s inflation touching 4.2 percent, the return in real terms on three-year government bonds with a 3.7 percent rate of return would have been minus 0.5 percent.

The five consecutive months of negative real interest rates mark the longest stretch since Statistics Korea began collecting figures on inflation.

“It proves that the BOK has to raise the call rate at a faster speed. Its monetary policy should depend on a complex set of barometers but taming inflation is central to the economy at the moment,” Oh said.

April was the fourth consecutive month that inflation had exceeded the central bank’s target of 2 to 4 percent.

A majority of bond dealers surveyed by the Korea Financial Investment Association and foreign investment banks predicted the BOK would raise the interest rate by a quarter percentage point to 3.25 percent in its rate review on Friday.

Goldman Sachs, Nomura and Deutsche Bank all expect a raise but Citigroup, an exception, said the BOK would delay the hike beyond June if it puts more focus on rising household debt.

By Cynthia J. Kim (cynthiak@heraldcorp.com)
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