Do you notice the Low-Interest Rates of Saving Account?
It is 1% for almost all accounts as a high yield. It means one will get a single buck for his hundred bucks deposited in the bank, causing a low interest rate in saving accounts.
Who decides Bank Interest Rates?
The bank itself sets the interest rates. A bank demands more deposits as they lend out that money and earn the amount obtained from the difference between what is paid as interest and what is collected from borrowers in interest. A bank earns 4-5% of the mortgage borrower and returns 1% saving interest; that is why there are low-interest rates.
The higher interest rates are offered because savers run for higher interest rates, and at the same time, the bank wants more money. Another reason for this money demand is the setting of interest rates from the Federal Reserve Bank. The banks borrow money from the Federal Reserve Bank at a set rate, called Federal Discount Rate. The Federal Bank also fixes rates at which banks lend to each other, known as the Federal Funds Rate. Savings rates, sometimes, rise higher than the target rates because a bank would either borrow from the Federal or other banks and have to handle hundreds or thousands of new borrowers. If money can be borrowed for less than a per cent, why spend more for the pleasure of dealing with more customers? These are exceptional cases, but generally, the Federal Reserve set rates to act like gravitation. Currently, the rates are fixed at zero – so it is hard to avail of high-interest rates, which causes low-interest rates.
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When will rates increase?
When the Federal Reserve Bank increases the target interest rates, the only minor difference is made to attract new customers, like 1% to 1.05%. The big shift will occur only if our economy is recovering from inflation. So there is little scope for an increase in the interest rate in the future. Till then, it is good to choose a low rate with a little risk.
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