Higher interest rates mean rising borrowing costs for consumers. But they are finally able to make some money with their savings in return.
The Federal Reserve has raised interest rates several times since March to combat high inflation and has indicated that more hikes are likely. In response, banks have gradually increased the rates they pay consumers for products such as certificates of deposit and savings accounts, which plummeted early in the pandemic.
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According to the Federal Deposit Insurance Corp. the average annual return on a one-year CD reached 0.46% in August. That is an increase of 0.15% since March. Similarly, the average interest rate on savings accounts rose to 0.13%, from 0.06% in March.
Online banks like Ally Financial Inc.
LANE -0.30%
and Capital One Financial Corp.
COF -0.56%
were the early movers. They have increased CD rates by an average of 0.43 percentage points and savings rates by 0.38 percentage points over the past month, Goldman Sachs Group analysts said. Inc.
GS -0.61%
said in a research note Monday. Goldman’s online bank, known as Marcus, recently offered 1.7% per annum on its savings account, up from 0.5% in April.
Deposit growth at online banks has lagged behind traditional banks since the start of the pandemic, said Adam Stockton of financial research firm Curinos. Online banks tend to have large companies in categories that have recently experienced high consumer demand for loans, such as credit cards and car loans. Raising the deposit rate allows them to keep up with their competitors.
While online banks are raising rates, bigger players like JPMorgan Chase & Co. and Bank of America Corp.
have barely succumbed. Large banks are typically slow to raise those rates because their extensive branch network and large marketing budgets usually keep them on hand with plenty of deposits. Pandemic stimulus measures further pushed up deposits at the largest banks.
The slowly rising deposit rate allows banks to pocket the difference between what they earn on loans and what they pay to customers.
Still, the bigger banks could raise their own rates in the coming months as loan demand is strong and further tightening is expected from the Fed, Goldman Sachs analyst Richard Ramsden said. “The reason you want to attract deposits is the extent to which you can do something with them,” he said. Deposits with commercial banks have remained stable this year, but could decline as consumers find more expensive alternatives to park their money, he added.
Meanwhile, Mr Stockton of Curinos said: “We expect more tariff competition to permeate in the fourth quarter and intensify in the first half of next year.”
Write to Charley Grant at charles.grant@wsj.com
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