Deposit Accounts' Interest Rates Dip Below 1%

(Dow Jones) Bad news for savers: The national average rate on checking, savings and other deposit accounts has dipped below the 1% 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% of the swing in deposit interest rates, also linked to money-market and certificate-of-deposit accounts, since 2001 is tied to the ebb and flow in the nation's jobless rate, which stood at 9.5% 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% 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 activities, 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."

Certainly, there are other factors that feed into low interest rates on deposits--most notably, the federal funds rate, which was 0.18% in July. The annual inflation rate, which was 1.24% 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.