To help tame inflation, the Fed has been raising interest rates, making it more expensive for people taking loans out to buy homes and cars.
One would think this means that interest rates are also being increased on savings rates at banks. But according to The Ascent, a Motley Fool service, the average rate on a 30-year fixed-rate mortgage is 6.40%, while the national average APY on savings accounts is only 0.24% as of February 2023.
Why aren’t we seeing banks roll out higher interest rates on savings accounts? It boils down to a few factors.
Thanks to the stimulus payments, many Americans were able to contribute more to their savings accounts. This wave of deposits led to “banks having more deposits than they need for loans,” said Jonathon Watterson, head data analyst at Money Crashers. “This excess supply of deposits reduces the need for banks to attract more deposits through higher interest rates.
Sluggish Loan Growth
Big U.S. banks have been seeing sluggish loan growth in recent months, and this is impacting savings account rates, too.
“Banks use deposits to make loans, and when their loan growth is slow, they have less need for new deposits,” Watterson said. “This reduced demand for deposits can result in banks not raising their savings interest rates.”
Fear of Recession
There’s anxiety in the air over a looming recession and that also influences how banks act.
“If banks are concerned about an economic slowdown or recession, they may be more cautious about lending money,” said Watterson. “This caution can lead to a reduced need for deposits, which in turn limits the pressure to increase savings account interest rates.”
Competition and Overhead Costs
It’s no coincidence that traditional brick-and-mortar banks tout lower interest rates on savings accounts than do online banks. This, Watterson points out, is because they face higher overhead costs compared to online banks, which can restrict their ability to offer higher interest rates on savings accounts.
“Additionally, the level of competition between banks can also impact the interest rates they offer,” Watterson said.
Banks have a slew of rules and regulatory requirements that need to adhere to, including maintaining specific capital and liquidity ratios, which can affect the amount of money they can lend out.
“When banks need to focus on meeting these requirements, they may be less inclined to raise interest rates on savings accounts in order to attract more deposits,” Watterson said, “This can result in a slower increase or no increase in savings interest rates for consumers.”
Banks Are Doing What They Gotta Do To Stay in Business
In all, it’s worth understanding that interest rates depend entirely on the current economic conditions and the central bank’s rate.
“For example, if the economy is suffering, particularly with slow growth, then the central bank will keep low interest rates to maintain their state as a profitable business,” said Scott Nelson, founder and CEO at MoneyNerd. “If the savings interest rate is high when the economy is weak, this will reduce their profit margin and affect their bottom line — which could lead to bank closures.”
In other words, banks keep interest rates low in times of economic uncertainty so they can remain open and successful.
Savings Rates Probably Won’t Go Up Much Anytime Soon
The Fed likely won’t be making moves to increase interest rates on savings accounts in the near future. According to Baruch Silvermann, CEO of The Smart Investor, “The majority of the rate increase has been done according to the Fed and considering the risks of a recession and potential additional bank crises, the Fed will prefer to take its foot off the gas in the next couple of months and see what happens. As long as inflation expectations continue to decrease, the Fed prefers to let the market digest the new situation and wait for more data.”
Make Moves To Get More Out of Your Savings Rate
There are moves one can make to help boost their savings interest rate, but they must be proactive. Your bank isn’t going to do any of this for you.
“To help their savings interest rates, people can look around at other bank savings accounts to see if any other places offer higher interest rates on savings, or even different types of saving options (e.g. high-yield savings accounts),” said Nelson. “Additionally, people may also think about investing in assets such as real estate, as these types of investments may produce higher returns than savings interest rates during inflation.”
Whatever you do, consider talking it through first with a certified professional. Nelson always recommends consulting with a financial advisor before making any big decisions “in order to work out which plan/solution suits your needs best.”
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