When did Savings account interest rates bottom out, and why?

I don’t pay much attention to savings account interest rates, but today I happened to notice that the bank I use is paying 0.1% interest for balances less the $25k.

Yes, that’s 0.1%. If they really like me and it’s connected to a checking account, that goes up to 0.2%.

What? When did this happen? I’m assuming it’s tied into the whole credit melt down, but I don’t see how.

In an attempt to keep the economy going, the Federal Reserve Bank cut the prime lending rate (the rate charged to the biggest, best customers) over the last year. IIRC, at one point it was as low as 2%.

If banks can borrow huge sums of money at that low a rate, it follows that they’re not going to pay individual savers very much just to get they’re very small business.

You’re thinking of the Fed Funds Rate, not the Prime, which is at 5%.

Tastes of Chocolate, as you can see from the chart on that page, the drop in the Fed rate started in 2001 and did not stop falling until 2004. The current fall started in 2007 and has probably reached bottom.

The fall came from the dot com bubble bust, when the Fed started cutting rates so that firms would continue to expand without the stimulus of the huge investments in dot com firms, and accelerated that to bring the economy back from 9/11.

Savings rates have been about this low since 2002, although you may be remembering the slight increase that took place in 2007.

Japan had the same problem after their real estate bubble burst in the 1980s and their savings rate actually hit 0%, IIRC.

I’m pretty sure you’re confusing a current account with a savings account. Interest rates of 0.1% or so are typical for current accounts.

Savings accounts are a different thing altogether (usually not instant access, often minimum balance required, and so on), and typically have interest rates of about 3%-4% at the moment. (based on a quick look at rates at Fool.com comparing US banks)

Here in the UK, a typical NatWest current account pays 0.1% but a lot of savings accounts pay as much as 6% or even more.

Interest rates on savings are actually quite a bit higher than they were a few years ago, and are improving. This is because banks want to attract more liquid cash, so they are trying to tempt savers to deposit with them.

Not necessarily. The Royal Bank’s traditional savings account (named “RBC Enhanced Savings”!) pays no interest on balances under $5000. Rate chart. Only with the higher-interest savings accounts offered by the likes of ING have they started to offer accounts with higher rates.

Those rates look pretty abysmal to me. Is that normal in Canada? Over here, people are used to getting at least 5% (gross) on savings even on small balances (see comparison table) and with ISAs (Individual Savings Accounts) you can get over 6% tax-free (although you can only deposit a maximum of £3,600 per tax year).

Sounds like a difference of terms. Here in the US, an instant access account that you can’t write a paper check off of is called a savings account. I’ve never actually seen anything here called a “current account”.

While I’m used to interest rates being in the 1-3% range, I’ve never noticed anything in the 0.1-0.5% range before today. Even a money market account, which I’ve always associated with slightly higher rates in exchange for higher minimum balances, is offering less the 0.50% APY.

I think what we call a “current account” would be known as a “checking account” in America - instant access, comes with a debit card and a chequebook, has your salary paid in monthly, etc.

My current account is with Natwest, and as I said, only pays 0.1%, but there are quite a few current accounts now offering much higher rates, e.g. http://www.halifax.co.uk/bankaccounts/highinterestcurrentaccount.asp

(Halifax is part of HBOS, so we shall see how long this offer lasts…)

I’ve never heard of a current account at a bank either. I can’t even find it in British usage. Even the Britannica definition says:

ETA: Can you provide an online cite?

I don’t know how relevant this is, but there was one day just last week that the short term (1 month, 3 month) Treasury Bill rate essentially went down to ZERO, because the sky was falling, everyone was taking money out of the stock market and putting it into Treasuries for “safety”. This was at the same time there were some grumblings that some Money Market Mutual Funds (with an implied, but not guaranteed, rate of $1.00) might go down to 97, 98 or 99 cents.

If this JUST happened with your accounts, this might have something to do with it, and maybe even today the interest rates are more in line with what you expect. Without knowing the bank you deal with, or their historical interest rate offerings, it’s tough to know for sure, but it’s one possible option.

Sorry if this is totally off base.

Fluctuations in the Fed Funds rate do not explain why this bank is offering 0.1% on a savings account. The Fed Funds rate explains why ING and is offering 3.x% instead of 4.x% (for example), but 0.1% is so small a rate that I think something else is going on. I think it’s actually tied to the previous bubble: the Internet.

The rise of internet banks and high-rate savings accounts changed how best to compete for customers. Traditional banks are competing with things like customer service and convenience, and for the most part ignoring interest rates, where they can’t compete. Your bank is offering such a low interest rate because it has determined that a higher interest rate on savings accounts is not worth it in terms of keeping customers, because any customers they have who are very interest-rate sensitive have already gone to the big internet banks.

Now, your bank, which I’m guessing is a traditional brick and mortar business, can’t compete with the likes of ING. Their overhead is simply too high. And general half-measures won’t get them there. If ING is paying 3% and Bank X brings their rate to $1.5%, they still lose all the customers who are very interest-rate sensitive, and they end up having to pay out extra interest to the many customers who just don’t care. Now, maybe they could offer 2.75%, which might make the gap enough to keep interest-rate sensitive customers from switching, but (1) it won’t lure back the ones that have already switched and (2) it will be even more expensive than the 1.5% option. So, there end up being two stable and profitable interest rate regions for banks to occupy. They can either pay very close to the best market rates, hoping that the gap will not be large enough for anyone who cares to jump ship, or they can pay a pittance, knowing that everyone who cares about interest rates is going to leave anyway, and they cut their costs. Presumably they don’t pay 0.00001% because it’s embarrassing.

Now, they do make some accommodation in the form of a higher rate for large balances. This is because as the balance gets bigger, so does interest rate sensitivity. So the bank has to increase their payout to keep the cost to their larger customers of switching lower than the benefits. If they offer other improved services to large account holders, this might make sense.

Anecdotally, I had a 5.05% account until January 2008, when it went down to 4.something percent. More recently it went down to 3.30%.

I think the real reason is banks want to make money. They pay a very low rate on small balances because you don’t make them much. They’ll try to make money on the spread of what they pay you versus what they charge to loan it out.

I’ve been wondering about this too. My large national bank was offering a pathetic 0.1% on savings accounts. I looked around at some other national and regional banks and found the same thing: none of them would pay better than about 0.3% without a five-figure balance.

However, Washington Mutual’s “online savings” account pays around 3.75% on any balance. If you open your account in person, you get the same crappy rates that every other bank offers, but if you open it online you get the good rate.

On the other hand, WaMu has been in the news a lot lately, and not in a good way…

Well as the link I posted shows, it is the usual British name for such an account: http://www.halifax.co.uk/bankaccounts/highinterestcurrentaccount.asp

From Wikipedia: http://en.wikipedia.org/wiki/Current_account_(banking)#Current_accounts

Sorry, I missed the line at the top of the Current Account article that pointed to current account (banking). I’m surprised I couldn’t find a reference to it elsewhere, though, because I checked through about 200 lines of Google links.

Simple market segmentation. The customers who care about such things find out about the good online rates, and WaMu captures that business. The customers who don’t care just walk in, and the bank has no incentive to pay any extra.

Government Seizes WaMu and Sells Some Assets.

That’ll lower their interest rates in a hurry.