SAN ANSELMO, Calif. – Deposits rates are expected to continue to decline or stay flat during the first half of 2010, according to a new study issued yesterday by Market Rates Insight, a research firm that tracks rates for deposits, loans and fees.
The report cites four major factors for the downward pressure on savings rates: the new FDIC rate caps and undercapitalized banks; the high unemployment rate; the Fed rate; and inflation.
“Each of the four main factors that we examined points in the direction of rate reduction for the first half of next year,” said Dr. Dan Geller, Executive Vice President at Market Rates Insight. “It is not clear as yet how deposit rates will evolve in the second half of 2010, largely because inflation remains an unknown factor, which may push interest rates up because e we are already seeing an increase in demand for inflation-protected investments, such as inflation-indexed bonds and mutual funds.”
These four factors are going to suppress deposit interest rates for a number of reasons, according to Gellert.
1. Undercapitalized banks tend to price deposits more aggressively compared to well- capitalized banks, up to the point of failure or rate restrictions by the FDIC.
2. Small and mid-size banks tend to price deposits higher than the top 19 banks (the “stress-test” banks).
3. Undercapitalized banks will find it harder to compete on rates in nine states, where the average maximum rate is higher than the FDIC rate cap.
4. The unemployment rate is a predictor of deposit interest rates. When the unemployment rate is high, the interest rate on deposits is low and vice versa. 5. The Fed rate is not likely to increase in the first half of 2010, and possibly not until 2011.
6. Inflation is not likely to increase in the first half of 2010, but may become a factor in the second half of the year.
