Projection for Rising Interest Rates

Last January, we published in BAI Banking Strategies our estimates for deposit interest rates in 2014. Now that we’re three quarters into the year, it’s time to ask: How did we do?

Let’s start with the big picture, the overall economy. We predicted, “From a macro perspective, we are likely to see gradual and sustained improvement in the economy in 2014.” Indeed, that has been the case. As Federal Reserve Chair Janet Yellen noted at the end of the Federal Open Market Committee meeting on September 17, “Economic activity is expanding at a moderate pace.”

Specifically in regard to deposit interest rates, we stated, “Rates of term accounts are projected to increase in a general linear pattern.” Additionally, “The increase in rates of deposit products is going to be moderate, gradual and volatile” and, “Expect national average rate increases to range from one-half to one basis point per month per product.”

Here are the actual figures. In the first nine months of this year, the national average for five-year certificates of deposit (CDs) increased by four basis points – from 0.86% in January to 0.90% in September. Similarly, the four-year CD rate increased by three basis points during the period, from 0.60% to 0.63%. The three-year CD rose by one basis point, from 0.47% to 0.48%.

As for rates on liquid accounts, we projected an “increase in a general down-curved pattern.” That meant that we expected that rates for checking, savings and money market accounts would likely decrease slightly before increasing. Although no actual decline in the rates of liquid accounts was observed in the first nine months of this year, the rates of checking, savings and money market accounts remained flat at 0.07%, 0.09% and 0.09% respectively. The fact that rates of liquid accounts have remained flat thus far is an indication that these rates are likely to exhibit a downward curve before they will rise again.

Our last projection was: “Since the starting point of the rate increases, i.e. current rates, is so low, it will take much longer for deposit rates to reach their pre-recession level.” This has, indeed, been the case. We have seen so far this year that the rate increase of the long-term CDs is very slow and moderate and this will be the case even when the Fed increases the Federal Funds rate. In other words, as the projection stated: “Deposit rates are not likely to exhibit big jumps month over month.”

So what does all this mean? It means that we are on track for rising rates, barring of course, any unpredictable major event that will derail the economic recovery. It also means that tracking pricing trends should be expanded to include monitoring rates of your entire market, not just within your competitive set, because statistically speaking, larger samples produce more reliable results.

Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at [email protected].