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Low loan demand: Low CD rates

By Sheyna Steiner · Bankrate.com
Thursday, August 16, 2012
Posted: 12 pm ET

Rates on certificates of deposit continue to set record lows, and not just by Bankrate's tracking methods. Market Rates Insight, a consulting firm to the banking industry, announced this week that the average five-year CD rate broke an unthinkable barrier, falling to 0.99 percent. That's the first time the long-term CD rate has dipped below 1 percent.

It's not quite there in Bankrate's weekly survey, but it's pretty close. This week's rate survey put the five-year CD rate at 1.03 percent.

Market Rates Insight Executive Vice President Dan Geller pins low CD rates to the lack of loan demand.

"As long as lending remains soft and loan rates low, we will not see a change of course in deposit rates," he said in a press release.

One doesn't have to look far to find evidence of weakening loan demand.

Mortgage applications were down 4.5 percent last week from one week previous, the Mortgage Bankers Association reported Thursday. Their weekly survey of mortgage applications indicated that applications were down 1.8 percent in the first week of August as well.

The most recent report on small business loans also suggests a decline, according to the Thomson Reuters / PayNet Small Business Lending Index. From May to June, small-business borrowing dropped off, with the index falling from 103.8 to 98.5, Reuters reported Aug. 1 in the story "Small-business borrowing falls in June."

Since the financial crisis began, banks have tightened lending standards. That naturally decreased the number of loans that could be made. There have been signs of loosening credit standards though. The most recent senior loan officer survey by the Federal Reserve showed that while lending standards are mostly unchanged, some banks have moved toward easing requirements.

While that could be a step in the right direction, it won't help CD rates, at least not yet.

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