Interest Rate Increases are Coming
How do banks in the region expect to be impacted?
Remember when people were scrambling for toilet paper at the beginning of the pandemic, back in March 2020? Almost two years later, that shift in scarcity of one bathroom item has now spread to a shortage in houses. The supply of homes for sale has hit a five-year low, leaving potential homebuyers in a tough market to find one that’s affordable.
Change may be on the horizon, however, as the word is that the Federal Reserve plans to raise the historically low interest rates it set back in February 2020.
“We expect interest rates to increase beginning in March,” said Guy Williams, CEO of Gulf Coast Bank & Trust. “Short-term rates will be higher at year-end by at least 50 basis points (.5%), possibly more.”
The Fed’s goal in raising interest rates is to combat inflation, which is currently the highest it’s been in more than 40 years. But those low rates directly contributed to lower mortgage rates—the pair are often closely tied to one another. So, while housing prices are going up, so is the cost of borrowing money to buy a house. On top of that, if you took out a mortgage to buy your home, your monthly repayment fee — your house note — may rise as interest rates go up.
On the surface, it might seem like banks can’t lose here. After all, if interest rates are higher, people pay higher fees on their loans, so doesn’t that mean banks make more money?
Chris Ferris, president and CEO of Fidelity Bank, said it’s not quite that simple.
“As interest rates rise, banks tend to benefit because it increases their interest income which is normally a financial institution’s largest source of revenue,” Ferris said. “However, if rates rise too high, it may impact a business or individual’s desire to borrow, as the cost to the borrower becomes too great.” Additionally, banks have to fund their investments, and higher market rates can mean higher funding costs.
Still, banks do stand to gain as rates rise. Even a small increase could lead to billions of dollars in revenue for the nation’s largest banks. Plus, things that generate liquidity, like stimulus payments and quantities easing, have led to stockpiles of cash that some bankers may redeploy into investments like securities.
“There remains a lot of liquidity in the market, so many of our clients, as well as the bank, have cash reserves,” said John J. Zollinger IV, director of commercial banking at Home Bank.
Zollinger said the impending increase may also spur some action. “In the face of rising costs, we may see a pickup in activity with decision makers choosing to act now, due to increasing rates and rising prices on goods.”
“Savers will benefit from higher deposit rates, and mortgage rates will trend upwards as well, which will slow the real estate market. Short-term certificates of deposit will begin to pay higher interest rates, as will money market accounts and savings. These rates will lag behind the federal rate increases due to a lot of excess liquidity in the system from the stimulus payments and the Fed’s quantities easing.” – Guy Williams CEO Gulf Coast Bank & Trust
President and CEO
Banks in our region will probably see some increase in earnings thanks to higher rates, but they will see a significant slowdown in mortgage banking revenues as refinances will, and already have to an extent, slow down dramatically.
John J. Zollinger IV
Director of Commercial Banking
Our business clients who are planning to make investments in their companies will have to decide whether to borrow or use their savings. Decisions will depend on the expense of borrowing, and some may opt to use more of their reserves to offset loan costs.