What future of CD rates may bring

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Often, in order to see into the future, you have to look to the past.

That’s exactly what Market Rates Insight did as it tried to figure out where certificate of deposit and savings rates could go this year.

Dan Geller, executive vice president of Market Rates Insight, said his firm turned to the past, notably the rising interest rate environment from July 2003 to July 2007, to understand some likely scenarios of deposit rate trends going forward.

“As it looks now, we are — if everything stays the same as it is — on the path of moderate and gradual economic improvement,” Geller said in a phone interview.

He explained that the improvement in the economy will encourage more borrowing and loans, which in turn will allow banks to increase deposit rates. Based on the current economic trajectory, Geller said consumers should expect to start seeing a mild and gradual increase in deposit rates, perhaps around midyear.

From examining the last rising rates era from 2003-2007, Geller expects rates to rise an average of 2 to 10 basis points per month, depending on the product. A basis point is one-hundredth of 1 percentage point.

CD rates will probably lead the pack when it comes to those rising deposit rates. He said he expects a more rapid and significant rise in CD rates than on other, more liquid deposit rates, since banks increasing their lending will want to attract deposits they know will be locked in for a certain amount of time.

Geller said most of the deposits right now are in liquid accounts like savings and checking accounts. Indeed, the popularity of CDs has nosedived along with their deposit rates. But Geller expects to see people shifting some of their balances from those checking and savings accounts to CDs and money market accounts as rates rise.

“It happened last time, and it’s likely it will happen again,” he said. “Money graduates to the highest yield.”

So while CD rates have been wallowing at record-level lows in recent years, the near future could be looking better for people who like investing in CDs.

Since the increase is expected to be gradual, Geller suggests that consumers consider step-up CDs that allow depositors to bump up their CD rates to reflect current yields.

And he stressed that there’s no crystal ball to see the future, noting that there are a lot of moving parts that could affect the economy and deposit rates.

What do you think? Would you switch money to CDs if interest rates started going up?

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