Interest rates paid by local lenders are nearing zero percent after the country's central bank slashed its policy rate to a fresh record low, which translates into negative returns on bank deposits when price inflation is adjusted, market observers said Wednesday.

According to the observers, Citibank Korea has slashed the annual interest rate on its savings accounts for companies to 0.01 percent from 0.1 percent.


A 0.01 percent interest rate yields 1,000 won ($0.85) per year in interest on every 10 million won in savings, but the actual return drops to 846 won after tax, they noted.

The final return, however, is in fact a loss when considering price increases that have so far remained at around 1 percent this year.

South Korean consumers have long faced the dilemma of choosing to keep their money stashed away in a bank account, investing or even spending the money as the Bank of Korea has kept its key interest rate at a record low of 1.5 percent since June 2015.

The central bank again slashed the key rate to a new low of 1.25 percent this month, again forcing local lenders to follow suit.

Woori Bank, another major commercial bank here, has reduced its interest rates on deposits by up to 25 basis points or 0.25 percentage point, while KEB Hana Bank too has lowered its deposit rates by the same margin.

Market observers advised it would be better for consumers to invest their money in low-risk funds instead of keeping the money in bank accounts that yield less in return than holding the money in cash.

Already, many are ditching large commercial banks for other financial institutions, such as savings banks or asset management firms, that are considered riskier than major lenders but generally offer higher yields.

As of end-April, deposits held at such non-bank financial institutions came to 2,022.15 trillion won, spiking 111 trillion won, or 5.8 percent, in just four months from the 1,911.1 trillion won tallied in December and breaching the 2,000 trillion won mark for the first time in the country's history, the BOK said earlier. (Yonhap)