Once deposit rates start rising this year, the banking industry will incur relatively high interest expense due to the inelasticity of consumer deposits in a rising-rate environment.
BAI Banking Strategies – February 11, 2014
I think the author makes some decent points throughout the article with his “10 likely scenarios”. However, I almost stopped reading after the opening paragraph (the emphasis is mine):
The question about rising deposit rates is not “if” but when and to what degree they will rise. The timing of the rise in rates is relatively easy to project because rates are dependent on economic conditions.
Really? The timing is relatively easy to project? Perhaps they are for the author, but I seriously doubt it. I wonder if he would have made this prediction about a 2014 rate rise if we had asked him back in January of 2012? What about Federal Reserve officials, you know that ones responsible for monetary policy? What’s their track record for projecting rates? As it turns out it’s not so good.
More than a third of the officials predicted that the Fed would start tightening in 2013. We now know that didn’t happen. Another third predict tightening will start in 2014. But the remaining members don’t see a move until 2015 or 2016. Who is correct? I don’t know. And for the most part no one else does either. That’s why brazen statements like “the timing of the rise in rates is relatively easy to project” really turn me off.