Retail banks set their own interest rates for the savings accounts they offer, but they're influenced by market conditions. At a basic economic level, the interest rate set on savings account deposits is determined by the relationship between how much banks value receiving extra deposits and how much savers value the services of a savings account. Those valuations are also manipulated by how governments and central banks target interest rates in the economy.
Learn more about what determines the interest rate on savings accounts and how to get a high-interest rate on your savings.
Key Takeaways
- When banks want extra deposits, they can raise the interest rate offered on savings accounts to attract extra cash.
- They lower rates when they want to decrease bank debits.
- The demand for Treasurys, which the Federal Reserve influences through its monetary policy, also affects savings account interest rates.
Supply and Demand of Savings Accounts
Most savings accounts are liquid accounts that protect the value of the principal you keep with the bank. Consumers value savings accounts for their safety and flexibility. Banks offer them to entice depositors to provide extra cash, which the bankers use to make loans.
When banks want extra deposits, they can raise the interest rate they offer on savings accounts to attract extra cash. If they want to decrease bank debits, they can lower interest rates. It is important that banks do not offer more interest for savings accounts than what they can charge on loans or earn on their other investments; if they did, they wouldn't make a profit.
People with cash to deposit consider the interest rates on savings accounts as they compare to the rates they can find on other savings destinations, such as bonds, certificates of deposit, and money market accounts; each vehicle for savings has its own advantages, disadvantages, and degree of risk. Each saver tries to find the best balance of security and return based on their preferences.
Government Influence on Interest Rates
In addition to supply, demand, and individual banks setting their own rates, the government influences savings account rates, too.
Suppose the Federal Reserve purchases a lot of new U.S. Treasurys, as it does as part of its mandate to maintain maximum employment and stable prices. This bids up the price of Treasurys and lowers yields.
Generally speaking, central banks and governments support low-interest rate environments. This artificially pushes down the rates earned everywhere else in the economy.
Banks can subsequently lower the rate offered on savings accounts and may need to lower the interest rate charged on loans, too. There are many reasons for this, including the fact that banks tend to invest in Treasurys for safe returns.
Remember that savings account rates have to compete with the other returns available in the market. When interest rates decline, savings account rates also drop. When interest rates rise, savings account rates are bid up.
Can Interest Rates Change on a Savings Account?
Yes, interest rates can and do change on a savings account. For instance, suppose you opened a high-yield savings account (HYSA) with an interest rate of 1.5% during a period of relatively low market rates and rising inflation. Over the coming months, as the Federal Reserve sets a higher and higher target Federal funds rate, banks—including your bank, holding your deposits—may adjust their rates, too. Your savings account might go from a 1.5% interest rate to 3%, 4%, or 5% as rates rise in general.
The opposite can be true, as well; if the Federal Reserve lowers its target federal funds rate and buys up Treasurys, you may see your own savings account interest rate drop as well.
Why Is the Interest Rate on My Savings Account Changing Again?
Savings accounts typically have variable interest rates, subject to market changes. When your bank needs more cash deposits, it may raise interest rates to keep your business. When interest rates fall, your bank will likely follow suit.
How Can I Get a Higher Interest Rate on My Savings Account?
Just because interest rates are rising in general doesn't mean that your specific savings account will see higher interest rates. If your savings account is still paying out a fraction of a percent in interest, it might be time to shop around. Check whether your bank might offer a different savings product with more favorable interest rates. If not, consider opening a high-yield savings account (HYSA)—these are often offered by online-only banks paying higher interest rates than traditional brick-and-mortar banks.
The Bottom Line
Interest on your savings account is how your bank compensates you for depositing your cash. Savings account interest rates can change frequently, and they're influenced by a number of factors, from the bank's own business goals to government monetary policy to global financial markets. Understanding why (and when) savings account interest rates change will help you to earn a satisfactory return on your deposits.
