Interest rate moves hitting home

Interest rate decisions at home and in the U.S. have already had an effect on the country’s financial markets with interest rates for loans climbing and bond markets slumping.

Interest rates for adjustable-rate mortgages at major commercial banks edged up Friday, a day after the U.S. Federal Reserve Bank raised its benchmark interest range to between 0.5 percent and 0.75 percent from the previous range of 0.25 percent and 0.5 percent. The Bank of Korea held its key rate unchanged at a record low of 1.25 percent on Thursday.

KB Kookmin Bank revised interest ranges on adjustable-rate loans, increasing them 0.1 percentage point to between 2.96 percent and 4.27 percent from 2.86 percent to 4.17 percent on Friday.

Woori Bank also pushed up its range to between 3.01 percent and 4.01 percent from 2.91 percent and 3.91 percent, another 0.1 percent increase. KEB Hana Bank imposed a moderate rise of 0.02 percent from 3.82 percent to 3.84 percent.

Interest on adjustable-rate loans are based on Cost of Funds Index (Cofix) along with spreads set by banks.

Cofix rates are calculated by averaging the interest rates of bank debentures, CDs, fixed deposits and installment savings by nine major lenders.

Analysts believe that the increased interest rate of bank debentures, a debt instrument at fixed or floating rate of interest, translated into the rise in the rates of adjustable loans.

Meanwhile, the bond market is the hardest hit by the U.S. move toward a rate increase.

The faster pace of U.S. rate increases indicated by the Federal Open Market Committee and surprise election victory of Donald Trump triggered a global bond rout as investors ditched bonds on expectations that the president-elect’s proposed infrastructure spending and tax cuts will result in higher inflation and higher amounts of U.S. government debt.

The move ended up raising the interest rates of Treasury bonds recently, prompting investors to dump bonds.

Hi Investment & Securities estimated that some 1.2 trillion won ($1 billion) in bonds were wiped out as of Dec. 15. Korea’s bond market has seen capital outflow for five consecutive months, according to the securities company.

Seo Hyang-mi, an economist at Hi, expected that the outflow will exacerbate as the dollar is expected to strengthen against the won. “Investors will flee Korea’s bond markets when the dollar strengthens, which is widely expected with the Fed’s move to increase its interest rate.”

BY PARK EUN-JEE, LEE TAE-KYUNG [park.eunjee@joongang.co.kr]