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Savings Account Interest Rates May Be Set to Rise

October 12, 2009

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Savings Account Interest Rates--What's Next?

Watching savings account interest rates lately has been like staring out over a calm ocean to the horizon: everything is low and flat. However, just as the ocean can be disrupted by forces that start out far away, the outlook for savings account rates may soon be shaken up by a number of developments that have been a long time coming.

Will this mean good news for savings account interest rates? That depends on which developments take hold most prominently--and what moves you make in response.

Four Significant Developments for Savings Account Interest Rates

Here are four recent economic or financial developments that could have a significant effect on savings account rates:

  1. Inflation. Generally, savings account rates will adjust to stay a little ahead of the inflation rate. The fact that inflation over the past year has been negative has allowed savings account rates to stay unusually low. However, while year-over-year numbers reflect a deflationary environment, the most recent months suggest that inflation is returning--and would likely force savings account rates upward. However, this rise in rates would be a hollow victory for depositors. If gains in interest rates only match increases in the cost of living, depositors would be no better off than when interest rates were low.
  2. Economic expansion. Fed Chairman Ben Bernanke has signaled that the recession may already have ended. Though this determination is really only definitive in retrospect, if true, it would be a positive for interest rates. Demand for capital rises in an economic expansion, which means higher interest rates must be offered to attract that capital. The end of the recession might be a double bonus in this case, because the government has taken extraordinary measures to drive interest rates below where they might otherwise be, in order to stimulate the economy. Once these measures are no longer necessary, interest rates will be free to rise to their natural levels.
  3. Housing. It's too early to pronounce it a sustained trend, but recent months have seen an uptick in housing prices. Higher demand for housing means higher demand for mortgages--another possible factor pushing interest rates higher.
  4. FDIC insurance funding. This is a potential fly in the ointment. The FDIC has signaled that its insurance fund needs replenishing. One option for doing this is to levy a special premium on banks. If this is done, it would create an added cost that some banks would take out of interest paid on savings accounts.

All in all, the best scenario for depositors would be a return to conditions similar to the mid-1990s: sustained growth with low inflation.

Two Ways to Watch Savings Account Rates on Money-Rates.com

The more changeable the market environment, the more important it is to keep a close eye on that market. To keep up with developments concerning savings account rates, you can use money-rates.com in two ways. First, watch the average savings account rate, to make sure your rate doesn't get left behind if the overall market starts to move up. Second, check out offers from individual banks. As conditions fluctuate, the spread between the highest and lowest savings account rates offered is likely to widen. That's fine, as long as you are on the right side of that spread.

 

Source:

• Standard & Poors: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_082562.xls

• Bureau of Labor Statistics: http://www.bls.gov/news.release/cpi.nr0.htm

• Greg Robb • Bernanke declares 'recession is very likely over' • Sep 15, 2009 • Market Watch: http://www.marketwatch.com/story/bernanke-declares-the-recession-over-2009-09-15

• Daniel Wagner • FDIC weighs extraordinary steps to shore up fund • Sep 22, 2009 • Yahoo Finance: http://finance.yahoo.com/news/FDIC-weighs-extraordinary-apf-3266069115.html?x=0&sec=topStories&pos=3&asset=&ccode=

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