South Korean banks are expected to start lowering interest rates tied to fixed deposit products and mortgages on Tuesday amid the Bank of Korea’s decision to slash its benchmark interest rate to a record low of 0.75 percent.

The rate affects what banks pay to borrow money overnight, affecting the level of interest rates of products that they offer to customers.

At the moment, the most popular and main fixed deposit products are those with a tenure of one year. Such products designed and managed by four major commercial banks here -- Woori, Hana, Shinhan and KB Kookmin -- all offer an interest rate between a range of 1.05 percent to 1.15 percent.

“Slashing interest rates of our fixed deposit products is inevitable now,” an official at a major bank here said.

“We will decide on the timeframe and the figures after considering factors including our loan-to-deposit ratio,” the official added.

But as the official hinted, the interest rate is unlikely to be lowered immediately, with commercial banks treading carefully in order to retain their customers.

When the BOK lowered its rate by 25 basis points in October, NH NongHyup was the first among industry peers to lower its deposit interest rate almost two months after the announcement. The other banks followed suit.

Unlike deposit interest rates, a drop in annual mortgage rates is expected to attract more customers for commercial banks.

Annual mortgage rates charged by commercial lenders including KB Kookmin, Woori and NH NongHyup fell 0.11 percentage point Tuesday from a day earlier.

The decline was attributed to a drop in COFIX, or the Cost of Funds Index, a benchmark lending rate for mortgage loans. The benchmark lending rate averaged 1.43 percent in February, dropping for the third consecutive months.

COFIX averaged 1.78 percent in March, up 0.03 percentage point from a month earlier. The benchmark lending rate rose for the seventh consecutive month.

With the lending rate for mortgage loans further projected to drop, industry watchers are highlighting the BOK’s previous concerns that by slashing its benchmark interest rate, money will flow excessively into the heated housing market.

In its first emergency board meeting since the 2011 global financial crisis, the BOK on Monday cut its base rate by 50 basis points to prevent an economic fallout from the novel coronavirus outbreak. It follows the US Federal Reserve’s emergency action hours earlier, to cut its base rate to near-zero percent.  

By Jung Min-kyung (mkjung@heraldcorp.com)