Ultra Low Interest: 1% Yield Savings Account Era on Horizon | BusinessKorea

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Bank of Korea Governor Lee Ju-yeol strikes his gavel after lowering the interest rate on August 14.
Bank of Korea Governor Lee Ju-yeol strikes his gavel after lowering the interest rate on August 14.
18 August 2014 - 4:34pm

Korea might have entered the era of ultra low interest rates, just like Japan.

As the Bank of Korea (BOK) lowered the standard interest rate, banks started to lower the yields on savings accounts and installment savings. One percent yield per annum is not a potential concern any more, but a reality. Due to Korea's aging society, the number of people who depend on interest income is increasing, which means that countermeasures for this situation should be urgently prepared.

According to the financial sectors and the BOK on August 17, the yield on a one year savings account in a commercial bank, which reached 5.87 percent per annum in 2008 when the global financial crisis hit, is declining very sharply. It became 3.86 percent per annum in 2010, 2.89 percent last year, and 2.68 percent in June this year.

Worse, as commercial banks have lowered their interest rates for the last two months, customers are actually feeling as if the yields are 2.2 to 2.3 percent per annum.

The BOK, though, adjusted the standard interest rate downwards from 2.50 percent per annum to 2.25. Even low 2 percent per annum products might disappear. Furthermore, if the additional decline in the standard interest rate happens, which some professionals already expect, savings products which have 2 percent per annum level yield will be extinct.

Although the trend of market interest rate shall be monitored, the Maginot Line of 2.0 percent per annum might be broken if 0.25 percentage points is reduced from a 2.2 percent per annum savings account.

An employee at Kookmin Bank said, “If there is an additional cut in interest rate, banks cannot maintain products with 2 percent per annum. If this downward trend of market interest rate continues, the era of 1 percent per annum yield could be realized.”

Lee Ju-yeol, governor of the BOK, left the possibility for additional interest rate cuts by saying at the press conference after lowering the standard interest rate, “We will consider all the indexes and react appropriately.”

Jun Hyo-chan, a chief researcher at Samsung Economic Research Institute, said, “Korea has already entered the era of ultra-low interest rates. Korea cannot be the only exception to the global ultra-low-yield trend.”

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