🚨 Deposit Interest Rates Hit 3-Year Low: The Beginning of a Great Money Migration

Today Korean Economic News | 2025.06.09

📌 Deposit Rates Plummet, Money Flows to Investment Markets

💬 Following the Bank of Korea's base rate cuts, bank deposit rates have fallen to their lowest level in 3 years, causing savers to move their money elsewhere. Major banks have cut term deposit rates to the mid-2% range, with some products now offering rates below the base rate (3.25%). This is driving investors seeking higher returns to move their money to stock markets, cryptocurrencies, real estate, and other investments, potentially causing major shifts in financial markets.

1️⃣ Easy Explanation

The interest you earn from keeping money in banks is getting much smaller. Now it's hard to even keep up with rising prices using bank deposits alone, so people are starting to move their money to other places that offer better returns.

Let's break down what's happening. When the Bank of Korea lowers the base rate, banks also lower their deposit rates. The current base rate is 3.25%, but the actual interest we get from banks is much lower. Most banks are offering around 2.5% annually for 1-year term deposits, which is 0.7 percentage points lower than the base rate.

The problem is inflation. Current inflation is around 3% per year, but if deposit rates are only 2.5%, your money is actually losing value. Simply put, if you put 1 million won in the bank, you'll have 1.025 million won after a year, but considering price increases, your actual buying power has decreased.

In this situation, people are looking for alternatives to bank deposits. In the stock market, quality dividend stocks yielding 3-4% are getting attention. In real estate, more people are considering buying instead of renting. Some are even becoming interested in cryptocurrencies like Bitcoin.

Young people especially are becoming more active in their investment approach. In the past, "safe deposits" were considered wise, but now "active investing" is becoming necessary. However, investing always comes with risks, so careful study and cautious approaches are needed.

Banks are also introducing various alternative products to prevent deposit outflows. These include equity-linked deposits (ELS), funds, and trust products. While these can offer higher returns than deposits, they also carry the risk of losing your principal.

We're at a turning point where we need to adapt to a new investment environment, moving away from the low-interest era. It's important to balance safety and profitability to create an investment strategy that fits your personal situation.

2️⃣ Economic Terms

📕 Base Rate

The base rate is the policy rate set by the Bank of Korea, serving as the foundation for all other interest rates.

• It's raised when the economy overheats and lowered during recessions to control the economy.
• The current base rate is 3.25%, and banks' deposit and loan rates are based on this.
• When the base rate falls, deposit rates also decline, making deposits less attractive.

📕 Interest Rate Spread

Interest rate spread is the difference between the loan rates banks charge and the deposit rates they pay.

• This difference is banks' main source of profit - the bigger the spread, the more banks earn.
• Currently, loan rates are 4-6% while deposit rates are 2-3%, creating a 2-3 percentage point spread.
• This structure is unfavorable for depositors but beneficial for bank management.

📕 Real Interest Rate

Real interest rate is the actual return rate after subtracting inflation from the nominal interest rate.

• If deposit rates are 2.5% and inflation is 3%, the real interest rate is -0.5%.
• A negative real interest rate means your money's actual value is decreasing.
• When making investment decisions, it's important to consider real interest rates rather than just nominal rates.

📕 Capital Migration

Capital migration is when investors' money moves on a large scale from one market to another.

• A typical example is money moving from deposits to stocks or real estate due to falling interest rates.
• This phenomenon can increase asset price volatility and market instability.
• Individual investors need careful judgment rather than just following trends.

3️⃣ Analysis and Economic Outlook

✅ How Falling Deposit Rates Affect Households and Financial Markets

• Let's analyze how the sharp drop in deposit rates affects individual investors and financial markets overall.

  • First, reduced interest income is changing household consumption patterns. Middle-aged and retired people who relied on interest income have seen their real income drop significantly due to falling deposit rates. In the past, putting 100 million won in a 1-year term deposit at 4-5% interest would earn 4-5 million won annually, but now it's only about 2.5 million won - nearly half. This especially hurts elderly people who used deposit interest to cover living expenses. They're forced to either reduce spending or gradually use their principal to make up for the income shortfall. Meanwhile, younger generations are turning to active investing, believing deposits alone can no longer grow their wealth.

  • Second, changing investment psychology is increasing preference for risky assets. Low deposit rates are driving investors to seek higher returns in stocks, real estate, cryptocurrencies, and other risky assets. Quality dividend stocks yielding 3-4% are particularly popular, and in real estate, people prefer buying over renting. The problem is this money movement could create asset price bubbles. When everyone thinks the same way and rushes into specific assets, prices can rise excessively and risk sharp declines later. Therefore, investors should establish their own investment principles rather than getting swept up in crowd psychology.

  • Third, banks' profit structure and business strategies are changing. Banks are lowering deposit rates while keeping loan rates relatively high, expanding their interest rate spreads. This increases banks' interest income, which is positive for bank performance. However, as deposit outflows accelerate, banks are seeking new revenue sources. Examples include expanding fee income, strengthening asset management services, and developing digital financial services. Banks are also actively selling alternative financial products like equity-linked securities (ELS), funds, and trusts to retain depositors. While these products can offer higher returns than deposits, they also carry principal loss risks, requiring careful judgment from investors.

• Falling deposit rates are driving structural changes not just in interest rates but in household asset allocation strategies and the entire financial market. To adapt to these changes, it's important to build portfolios that match individual risk tolerance and investment objectives.

✅ Characteristics and Risk Factors of Alternative Investments

• Let's examine the features and precautions of major investment alternatives to deposits.

  • First, stock investing is the most popular alternative, but managing volatility is key. The KOSPI dividend yield is currently around 2.5%, similar to deposit rates, but investors can also expect capital gains from rising stock prices, attracting many investors. Stable dividend-paying bank stocks, telecom stocks, and utility stocks are particularly popular as "dividend-type deposit" alternatives. However, stocks carry principal loss risks and can show high volatility depending on market conditions. Therefore, it's important to manage risk through split investing (dollar-cost averaging) or portfolio diversification rather than investing large amounts at once. Diversified investing through ETFs or index funds rather than individual companies is also a good alternative.

  • Second, real estate investment offers stability but has high entry barriers and liquidity issues. Real estate has traditionally been considered an inflation hedge, offering both rental income and capital appreciation potential. Particularly in metropolitan areas, rental yields of 3-4% are higher than deposit rates, increasing interest. However, real estate investment requires large initial capital and has liquidity risks - it's hard to convert to cash when needed. It's also affected by various external factors like government policy changes, regional development plans, and demographic shifts, requiring careful location selection and market analysis. Small investors might consider indirect investment through REITs or real estate funds.

  • Third, cryptocurrencies offer both high profit potential and extreme risks. Major cryptocurrencies like Bitcoin and Ethereum have been rising recently, attracting some investors. The biggest appeal of cryptocurrencies is their high profit potential - you might earn tens of percent in a short period. However, loss risks are equally extreme, with daily fluctuations of 10-20% being common. There are also unique risks different from traditional investment assets, such as regulatory risks, hacking dangers, and market manipulation possibilities. Therefore, cryptocurrency investment should be limited to small amounts within 5-10% of total assets, using only money you can afford to lose.

• Alternative investments each have unique characteristics and risks, so you shouldn't just pursue high returns blindly. It's important to build a balanced portfolio considering your investment experience, risk tolerance, and investment timeline.

✅ Personal Financial Management Strategies in the Low-Interest Era

• Here are specific financial management strategies individuals should adopt in the era of falling deposit rates.

  • First, diversifying asset allocation for risk distribution is essential. Since deposits alone can no longer grow wealth like in the past, diversified investment strategies across multiple assets have become important. Generally, a basic ratio of 40% safe assets (deposits, government bonds), 50% growth assets (stocks, real estate), and 10% alternative assets (cryptocurrencies, commodities) is recommended, adjusted based on individual age and risk preferences. Younger people should increase growth asset proportions, while those nearing retirement should increase safe asset proportions. The key is not concentrating on one asset but diversifying to reduce risk.

  • Second, forming regular investment habits and long-term perspective investing is important. In the low deposit rate era, systematic investing through regular contributions is more effective than savings accounts for steadily growing assets. This involves investing fixed amounts monthly in equity funds or ETFs, allowing you to average out market volatility while pursuing long-term returns. For example, if investing 500,000 won monthly, you might split it: 300,000 won in stocks, 150,000 won in real estate funds, and 50,000 won in overseas ETFs. The key is practicing "mechanical investing" - continuing to invest steadily regardless of market ups and downs. Getting emotional and stopping investments when markets fall or investing all at once when they rise can actually lead to losses.

  • Third, acquiring financial knowledge and managing fees to improve investment efficiency is necessary. Unlike deposits, investments involve various fees and taxes, so understanding and managing these properly is essential for maximizing real returns. Funds have management fees, sales fees, and redemption fees, while stock investments have transaction taxes and securities transaction taxes. Even with the same performance, high fees can significantly reduce actual returns, making it important to choose low-cost products. You should also actively utilize tax-advantaged accounts like ISA, pension savings, and IRP to maximize after-tax returns. Most importantly, thorough study before investing to understand product characteristics and risks is crucial.

• Financial management in the low-interest era has shifted from passive deposit-centered to active investment-centered paradigms. However, rather than pursuing excessive risks, it's advisable to pursue stable asset growth through systematic planning and consistent execution.

4️⃣ Conclusion

Deposit rates falling to their lowest level in 3 years represents more than just an interest rate change - it signals a fundamental shift in personal financial management paradigms. In the past, bank deposits alone could provide stable interest income, but now active investing has become necessary for asset growth.

This change particularly burdens retirees and middle-aged people. Those who relied on deposit interest for living expenses now face reduced income and must change their lifestyles. Meanwhile, younger generations are embracing this as an investment opportunity, actively exploring various investment options like stocks, real estate, and cryptocurrencies.

However, blindly pursuing high returns isn't the answer. Investing always carries risks, and hasty investment decisions without sufficient financial knowledge can lead to significant losses. Therefore, it's important to develop investment strategies suited to your situation based on thorough study and careful planning.

While banks are introducing various alternative products to counter deposit outflows, investors shouldn't be swayed by flashy marketing but should accurately understand the essence and risks of products. Particularly for products without principal protection, even more cautious approaches are needed.

Government and financial authorities also need policy support for these changes. They should create environments where ordinary investors can invest safely and efficiently through expanded financial education, strengthened investor protection systems, and widespread low-cost investment products.

Ultimately, the low-interest era is both a crisis and an opportunity. By breaking away from past complacent investment methods and developing financial management capabilities suited to the new era, we can create better economic futures. What matters is consistency over haste, and prudence over recklessness.