Why savings interest rates aren’t increasing like loan interest rates

Rising interest rates have been a hot topic the past year, as the Federal Open Market Committee (FOMC) raises interest rates for the Federal Reserve system, the central bank of the United States. Many business owners wonder what rising interest rates mean for their business in terms of loan and savings interest rates and wonder why loan interest rate increases aren't mirroring savings rate increases.

Jon Stewart, Retail Team Leader, Coastal Community Bank, said he talks to customers daily about their questions regarding interest rate increases. "Customers often ask why savings interest rates aren't increasing the same way loan rates are, and how the federal fund rate (fed fund) increase affects home loan interest rates," he said. "I've been in banking a long time, and it's understandable for even the savviest to have questions like these because historically, interest rates have acted differently."

Why are savings rates not increasing as much as loan rates?

Stewart explained that typically, as the Federal Reserve moves the fed fund up and down, financial products that are variable and tied to some sort of agreement or contract are also likely to move right away. For instance, variable rate loans and certificates of deposit are tied to a particular index like fed funds or prime rate, and their rates move accordingly.

However, Stewart explained that when it comes to increasing or decreasing other deposit rates, that is up to the individual bank and how they manage their balance sheet (loans and deposits) and the type of loans they offer. Banks that offer consumer loans at higher interest rates may be more willing to pay more on savings accounts because the increased cost of that higher savings account is offset by the interest on the loan.

Why do some financial institutions offer special savings account rates and others don't?

Stewart explained that customers ask him why they see CD specials and special interest rates at some financial institutions while others aren't offering those specials. "Some financial institutions will offer a much higher rate of return in the short term to attract new customers," he said. "Other banks may increase rates to remain competitive. As banks offer these rates, they will need to find ways to offset the increased cost of paying this higher interest rate. When the Fed lowers the rate, which they will eventually, they must still pay the same high rate on those accounts."

"It's different now than it has been in the past for a few reasons," Stewart said. "Savings rates have not been rising at the same pace. In the past, banks would increase savings account interest rates to help encourage people to hold their money in a Bank's savings account, i.e., a money market, Certificate of Deposit (CD), or savings account, so the bank can use the money to lend. The difference now is that banks have more deposits than in years past and don't necessarily need more deposits to offer loans. Increasing savings account rates is not as necessary as in the past."

How does the federal fund rate impact home loan rates?

"This is where it gets confusing and complicated," Stewart said. "The federal fund rate is just one of the multiple factors in mortgage interest rates and influences short term and variable rate mortgages that reprice more frequently." He further explained that longer-term fixed-rate mortgages tend to be more influenced by the 10-year treasury, interest rate curve, and longer-term inflation expectations.

Stewart said every business and financial institution has different goals and needs, and the increase and decrease in rates can have an impact. He encourages businesses to speak to their banker about any questions about the rate environment and how they can work with them to help plan in the current economic climate.

Jon Stewart is VP, Retail Team Leader at Coastal Community Bank. For more information, contact a banker at one of Coastal's 14 local branches. www.coastalbank.com Member FDIC. Equal Housing Lender.

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