Prime interest rate hikes benefit biggest of depositors most
Prime interest rate hikes mean bank customers may have more money in their pocket. As local interest rates rise, long-time savers may see the difference in the coming months.
“The impact of rising interest rates should already be felt on deposits that have a short maturity,” said Nathaniel Karp, chief economist for BBVA Compass.
The extent of the increase varies, said Manuel Lasaga, president of StratInfo in Miami.
“Our banks may not necessarily raise the interest rates on a one-to-one basis to increase of the Fed’s funds rate,” Mr. Lasaga said. “Perhaps those funds are less sensitive to changes in interest rates. What the banks have been paying on their deposits has not risen to the same extent that we’ve seen in the past year in the Fed’s funds rate.”
Retirees and others with a larger savings account will see a higher return, Mr. Karp said. “The fact that we’re heading into higher interest rates, I think that’s going to be mostly beneficial to people that have a large amount of savings because now they’re going to get a bigger return for this wealth and it’s going to allow them to have a higher string of income coming in,” he said.
Mr. Karp says those with minimal savings, such as the millennial generation launching into a career or graduating from college, won’t see much benefit.
“For these individuals, the low interest rate environment has benefited them because they’ve been able to borrow at the lower rate,” Mr. Karp said. “Now that rates are moving back up, they don’t benefit that much from their savings because their savings are still small, but then they have to pay a higher interest rate on their borrowings.”
Senior advisor of the Coral Gables-based Washington Economics Group Tony Villamil explains the math behind why larger savings incurs higher interests.
“Usually banks tend to pay higher rates for higher amounts because then you can use that deposit and lend the money out,” Dr. Villamil said. “The cost of processing the deposit is lower because you have a higher amount per dollar per deposit. If you bring $250,000 or $1 million, I may negotiate with you a higher rate because it costs me less to process per unit per dollar deposited.”
Customers can expect both multinational and community banks to reward them.
Calixto Garcia-Velez, executive vice president and regional executive for FirstBank Florida, says some customers may reap higher benefits at a community bank.
“Typically, national banks pay much lower interest rates than community banks because national banks for the most part as a general rule have a lot more deposits than they usually need, meaning that they have more deposits than they have lending needs,” Mr. Garcia-Velez said. “Even as interest rates go up, they are not very responsive in passing the interest rate increase to their customers because they don’t need to.”
Percentage increases might not rise for some time on payments banks make to their customers.
“The federal funds rate is still awfully low,” said Mark Vitner, managing director and senior economist at Wells Fargo. “We’ve never seen interest rates this low occur, between 1.25% and 1.5%. That said, deposit rates have started to rise. They’re not likely to rise in lock step with the federal funds rate until the federal funds rate gets maybe a percentage higher or more.”
While some may benefit more than others, Mr. Karp says the hikes in interest rates benefits everyone, seeing that they indicate a healthy economy. “When you have higher interest rates coming from stronger economic performance,” he said, “it’s good for everybody in general.”