Even with Base Rate Hike... US Banks Unlikely to Raise Deposit Interest Rates

[Image source=AP Yonhap News]

[Asia Economy Reporter Cho Hyun-ui] Even if the U.S. Federal Reserve (Fed) raises the benchmark interest rate in March, the deposit interest rates at U.S. banks are not expected to rise for the time being.

The Wall Street Journal (WSJ) reported on the 9th (local time) that "Although the Fed is expected to raise the benchmark interest rate several times this year starting with the Federal Open Market Committee (FOMC) meeting next month, deposit interest rates are unlikely to increase accordingly."

In fact, bank executives recently announced their fourth-quarter results for last year and predicted that deposit interest rates would not rise in line with the Fed's rate hikes.

This is because banks already hold sufficient deposits and have no reason to secure more deposits by offering higher interest rates.

Due to the massive economic stimulus measures by the U.S. government in response to the economic downturn caused by the COVID-19 pandemic, Americans' bank balances have increased, and companies are overflowing with cash.

Total deposits at U.S. commercial banks surged by $4.8 trillion (approximately 5,746 trillion won) from $13.3 trillion (about 15,921 trillion won) in January 2020 to $18.1 trillion (about 21,666 trillion won) in January this year, over two years.

After the Fed lowered the benchmark interest rate to near zero in March 2020, when the COVID-19 pandemic began, deposit interest rates also fell accordingly.

According to financial information provider Bankrate.com, the average interest rate on savings accounts at major U.S. banks was only about 0.06% at the end of last year.

For banks that earn profits from the spread between lending and deposit rates, such ultra-low interest rates create an unfavorable business environment. According to data from the Federal Deposit Insurance Corporation (FDIC), the net interest margin (NIM) of U.S. banks fell to a record low of 2.5% in the second quarter of last year from 3.28% in the fourth quarter of 2019.

WSJ stated, "During the pandemic, low interest rates combined with weak loan demand caused deposits and loans not to function properly," adding, "For deposit interest rates to rise, banks need to increase lending."

Banks reported that loan demand increased in the fourth quarter of last year. Most expect this trend to continue this year.

A representative from financial services research firm Curinos said, "Banks will need to lend more than they currently do for deposit interest rates to rise to a significant level."