What to Expect When Deposit Rates Start Rising
Here is the latest analysis from Market Rates Insight’s Executive Vice President Dan Geller published in BAI. According to our historical analysis of rising interest rates, it will take about 11 months for the average rate of term accounts to climb to 1%, and another 29 months to reach 4%. Here are Dan’s observations:
The decline in deposit rates, which started nearly five years ago, may be coming to an end. It appears now that the national average rate of all liquid accounts has stabilized, as have rates on certificates of deposits (CDs) up to 24 months. Rates of long-term CDs of three to five years continue to decline but at a slower pace. This may be an indication that deposit rates are nearing their lowest point, which is a prerequisite for any future increases in deposit rates.
Even when deposit rates reach their turning point, it’s hard to tell exactly when rates will start rising because of the many macro-economic variables that need to become favorable before this happens. However, it is possible to project, with a reasonable level of confidence, the pace and extent of rate increases once they start rising.
We’ve based our analysis on three cycles of interest rates increases that occurred within the last 20 years. The first period was between April 1993 and December 1994, the second between January 1999 and November 2000 and the third between August 2003 and July 2007. The rate increases during each of the three time periods varied. Therefore, the average of the three periods was used to construct a time series model in order to smooth out those variances. The analysis includes a projection for the average of term accounts, which is the average of all terms from three to 60 months, and the average of liquid accounts, which includes checking, savings and money market accounts.
Our conclusion is that once interest rates on deposits start rising, we can expect the following to occur:continue reading »