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CHICAGO
— Bad news for savers: The national average rate on
checking, savings and other deposit accounts has dipped
below the 1 percent mark for the first time in at least
10 years — and doesn't appear headed higher anytime
soon, according to an analysis by Market Rates Insight.
Not
surprisingly, the woeful state of the economy is the
culprit: A "strong and significant negative
relationship" between unemployment and the interest
rates paid on consumers' deposits has reared its ugly
head,
San Anselmo, Calif.
-based MRI said.
The study
found that a whopping 65 percent of the swing since 2001
in deposit interest rates, also linked to money-market
and certificate-of-deposit accounts, is tied to the ebb
and flow in the nation's jobless rate, which stood at
9.5 percent in July.
"Clearly
the unemployment rate is a major factor in deposit
rates," said
Dan Geller
, executive vice president at MRI and author of the
study.
The gap
between the national average of deposit rates and
unemployment has widened considerably since the middle
of 2007. The national average interest rates fell to
0.99 percent in July.
As a
barometer of economic activity, the unemployment rate
typically reflects credit and lending activities. In
this recession, the relationship is marked by the
tightened state of credit markets.
"When
there is less lending (activity), lending institutions
require less deposits to fund lending," according
to the study. "Although lending institutions will
never refuse deposits, they lower the interest rate on
these deposits to the lowest possible level.
"Hence,
when unemployment goes up, deposit interest rates go
down," the study said.
Certainly,
there are other factors that feed into low interest
rates on deposits — most notably, the federal funds
rate, which was 0.18 percent in July. The annual
inflation rate, which was 1.24 percent last month, fuels
the prevailing level of interest rates as well.
"Historically,
the Fed did not increase the funds rate during high
unemployment periods," Geller said. "When we
see the unemployment rate start to decline, it will be a
sign that interest rates on deposits are about to go
up."
Earlier
this month, Geller predicted that interest rates on
deposits would continue to fall as banks look for ways
to make up for the loss of fee income as a result of new
regulations on electronic fund transfers.
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