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CLIP Index update: September 2014

MoneyRates.com Senior Financial Analyst, CFA
October 22, 2014

After improving in each of the previous four months, the environment for bank rates worsened overall for consumers in September, according to the MoneyRates.com CLIP Index. Still, there are reasons for consumers to hope that better conditions may be on the way in the waning months of 2014.

The CLIP Index widened by four basis points in September, to 4.10 percent. This leaves the CLIP Index well above its historical norm of 2.86 percent. Since the CLIP Index measures the spread between the interest consumers are charged on mortgage loans and the interest they earn on deposit accounts, this wider spread means that rate conditions favor banks over consumers right now.

September's rate changes

The four-point widening of the CLIP Index was entirely due to a slight rise in mortgage rates last month. This was the first monthly rise in mortgage rates since March, but 30-year rates remained exceptionally low in September, at an average of 4.16 percent.

Meanwhile, deposit rates continue to languish near zero. One-month CD rates have been flat-lining at 0.06 percent since June. For both mortgage rates and CD rates, recent conditions have been unusually calm. This begs the question of what could shake up bank rates -- and will it bring a change for the better?

Better days ahead for bank rates?

Here are three things that could help bank rates -- and especially deposit rates -- in the months ahead:

  1. Economic improvement. According to the Bureau of Labor Statistics, the unemployment rate recently dropped below 6 percent for the first time since 2008. Economic weakness has been the fundamental reason that interest rates have been so low, so getting the employment rate back to normal is a step in the right direction. There are some valid criticisms about how meaningful the unemployment rate is, because it includes only people who are actively looking for work, and it does not measure how many people are under-employed in low-paying jobs. Still, the raw number of jobs created from month to month has been strong, which indicates that the economy is improving.
  2. Changing Fed policy. Fed policy in response to the weak economy over the past several years has been to drive interest rates down. There is now widespread discussion that 2015 will be the year when the Fed finally lets short-term rates rise. The bad news is that the Fed is already unwinding the program that drove mortgage rates down to record levels, so borrowing interest rates could rise before deposit rates.
  3. Disappearing inflation. Prices actually declined in August, with the Consumer Price Index (CPI) dropping by 0.2 percent, and in September the CPI rose by only 0.1 percent. Deflation can be a sign of economic weakness, but juxtaposed with continued employment growth, that does not seem to be a likely concern in this case. Instead, it seems falling energy prices are giving consumers a little break from inflation. As unwelcome as deflation may be to some, with bank rates near zero, it is the only way deposit accounts can gain any purchasing power.

Of these, only September's deflation has helped deposit customers so far, but if the economy can keep up its momentum, the first two factors could set the tone for interest rates in 2015. The trick will be for deposit rates to rise faster than mortgage rates, so that the CLIP rate narrows and consumers really benefit.

About the CLIP Index

The Consumer Lost Interest Percentage (CLIP) Index measures how much interest consumers are currently losing in the gap between mortgage and deposit rates. To create this index, MoneyRates.com compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.

It makes sense that mortgage rates exceed the interest rates paid on short-term deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.

The graph on the below represents the arc of the CLIP Index, measured in annual averages, from 1971 to 2013.

CLIP Index: 1971 through 2013

MoneyRates.com updates the CLIP Index every month to gauge what kind of deal banks are offering their customers. This gives consumers an opportunity to better understand today's banking landscape -- and how to get the most from it.

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