Don’t expect rising interest rates to boost your savings account

Banks have little incentive to increase the interest they pay on deposits because they simply don’t need the money. Government stimulus measures have ballooned Americans’ bank account balances and businesses are teeming with cash. Total deposits in U.S. commercial banks swelled to around $18.1 trillion from around $13.3 trillion at the start of 2020.

Banks – which pocket the difference between what they charge borrowers and what they pay depositors – are expected to seize the opportunity to breathe life into their bread-and-butter lending business. Lending profit margins fell to new lows in the banking sector after the Fed cut rates to near zero in March 2020 at the start of the Covid-19 pandemic.

The average rate on a savings account at the biggest US banks was around 0.06% at the end of last year, according to Bankrate.com. Many high-yield savings accounts, which offered 1.5% or more before rates headed toward zero in early 2020, now offer rates around 0.5%.

During fourth-quarter earnings calls last month, bank executives said those rates were unlikely to move in tandem with Fed increases this time around.

The “overall rate paid will be lower during this next rate hike cycle,” said Jenn LaClair, chief financial officer at Ally Financial. Inc.,

ALLY 1.73%

which offers a high-yield savings account.

For deposit rates to rise, banks need to make more loans. Low rates coupled with lackluster borrower demand through much of the pandemic have thrown deposits and lending out of whack. But it’s starting to move. Banks reported higher loan demand in the last three months of 2021, and most expect this trend to continue in 2022.

“You’re not going to see deposit rates jump by any magnitude until banks have a lot more loans on their books than they have today,” said Pete Gilchrist, head of retail deposits and commercial banking at Curinos, a financial services research firm. solidify.

Rising rates could encourage some depositary clients to shift some of their money into higher yielding investments. This could prompt some banks to raise deposit rates.

Ryan Engle from Austin, Texas opened a high yield savings account with American Express Co.

AXP 1.24%

when it offered a rate higher than 1.5%. About a year later, he noticed that the rate had started to decline, towards its current level of 0.5%.

“At that point, I realized the money probably didn’t do anything and I probably should do something with it,” Mr Engle said. “But work got busy again, so I was like, ‘You know what? At least that’s for sure. ”

Mr Engle said he plans to hand over the savings to a wealth manager to invest this year.

Write to Orla McCaffrey at orla.mcaffrey@wsj.com