"Bank of Korea Cuts Benchmark Interest Rate – Will Loan Rates Drop Too?"

# South Korea's Base Rate Cut Likely in May: Spotlight on Lending Rate Implications With the Bank of Korea (BOK) gearing up for a potential base rate cut in May, the focus is on whether this will lead to a decrease in lending rates. While deposit rates at major banks have plummeted, nearing the 1% mark, household loan rates remain stagnant around 4%, highlighting a significant disparity. Data from the Korea Federation of Banks, reported on the 27th, reveals that fixed rates for newly issued home mortgage loans at South Korea's leading banks—KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup—ranged between 4.16% and 4.40% annually as of March. The average lending rate was about 4.30%, an increase of 0.35 percentage points from September last year (3.95%), just before the BOK's rate cuts. Despite the base rate dropping from 3.50% in September to its current 2.75%, lending rates have paradoxically risen. This disconnect is due to banks’ strategies to manage household loans by reducing preferential interest rates, keeping effective lending rates high despite a lower base rate. In March, the average preferential rate on home loans at the five major banks was 1.65%, down 0.65 percentage points from 2.30% in September. Because lending rates are determined by adding a risk premium to a benchmark rate and subtracting any preferential rate, a reduction in preferential rates keeps lending rates high. # Bank of Korea Expected to Cut Rates Again With the BOK likely to cut the base rate further, lending rates might see more downward pressure. The Bank of Korea will hold a Monetary Policy Committee meeting on the 29th to decide the new benchmark rate and revise its economic growth outlook. Market expectations are for a 25-basis-point cut, lowering the base rate from 2.75% to 2.50%. Growth projections could also be downgraded from the previous 1.5% forecast. Nevertheless, the decline in lending rates may be slow due to increased scrutiny by financial regulators. Regulators are enforcing tighter control of household debt, especially following a loan surge prompted by the temporary suspension of the Land Transaction Authorization Zone. There are concerns that lower interest rates combined with speculative borrowing could further swell household debt. Industry insiders are cautious, considering the upcoming implementation of stricter third-phase Debt Service Ratio (DSR) regulations set for July, which may drive last-minute household borrowing. Data indicates household loans at the five major banks surged by about KRW 3.4069 trillion in the first 22 days of May compared to the previous month. # Regulatory Oversight Tightens Amid Surging Household Loans Regulatory authorities are intensifying oversight due to rising household debt concerns. A financial official stated, "Considering the potential for household debt to balloon in May, we will monitor compliance with monthly and quarterly management targets by financial institutions closely. If necessary, immediate measures will be taken." Meanwhile, deposit rates have seen a sharper decline compared to lending rates. The basic annual interest rates for one-year fixed deposits at the five major banks have dropped to between 2.15% and 2.65%, nearing the 1% range. The "deposit-loan rate gap"—the difference between deposit and lending rates—has widened for the eighth consecutive month, reaching an average of 1.472 percentage points in March. As the deposit-lending rate gap increases, banks face increased scrutiny over perceived disproportionate profit-taking at households' expense, even as base rates fall. Investors and policymakers will watch developments in May closely, as they hold significant implications for monetary policy, financial stability, and consumer finances.