Latest analysis reveals deposit rates will remain low while deposit balances will increase but with a shift from term to liquid accounts
The newly-released Deposit Trends and Projection for 2011 report, by Market Rates Insight (MRI, www.marketratesinsight.com), projects deposit rates will remain low in 2011 mainly because the Fed Funds rate is expected to remain at its current level (0-0.25 percent) in the near term. Traditionally, deposit rates mirror fluctuations in the Fed Funds rate, which rises when inflation increases and vice versa. However, the high unemployment rate will likely delay any near-term rise in the Fed Funds rate. A similar scenario occurred after the recession of 2000, when the inflation rate increased from 1.07 percent in June of 2002 to 3.02 percent in March of 2003 yet the Fed Funds rate did not rise right away, which caused deposit rates to remain low.
Deposit balances are projected to increase mainly due to persistent uncertainty about near-term economic recovery causing consumers to gravitate towards the security of FDIC-insured deposits. In addition, a volatile equity market makes the average consumer nervous about alternative investments despite the potential for higher returns. Also, the extension of the Bush-era tax cuts will positively impact deposit balances due to the very strong and significant relationships between disposable personal income and savings.
Deposit balances will continue shifting from term to liquid accounts. Dropping deposit rates have reached a point of minimal yield differentiation between some term accounts and liquid accounts, which will trigger a shift of balances from CDs to MM, savings and checking accounts. Currently, the national average rate on a 9-month CD is the same as the national average on a MM account causing balances of maturing CDs to flow to MM accounts.
"In 2011, the average consumer is going to continue making deposit decisions based on emotions, mainly fear due to economic uncertainty," said Dan Geller, Ph.D. Executive Vice President at Market Rates Insight. "The safety and security of FDIC-insured deposits combined with the quick and easy access to money offered by liquid accounts are going to have greater appeal for consumers than low interest rates."
The complete report is available at http://www.marketratesinsight.com/docs/NPIYF2011.PDF.
About Market Rates Insight
Market Rates Insight (MRI, www.marketratesinsight.com) has been providing competitive pricing information and analysis to financial institutions for 25 years. MRI's competitive data is complete, detailed and timely enabling the highest level of pricing precision and ensuring greater pricing optimization for improved profitability. In addition to competitive pricing data, MRI also conducts pricing analyses and tracks industry indices. MRI's indices are published weekly in the National Pricing Indicator report, the industry standard for deposit pricing for executives at banks and credit unions.
Contacts:
Market Rates Insight, Inc.
Dan Geller Ph.D., 415-448-8813 (phone)
415-259-0701
(fax)
Executive Vice President
Dan.Geller@MarketRatesInsight.com
Tom
Woolf, 415-259-5638
tom.woolf@marketratesinsight.com
