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October 2, 2022

Factors that influence savings account interest rates

The interest rate of any financial product is the representation of the cost of making transactions, whether it is giving or receiving money. The place where people hear about interest rates most often is while taking loans. They focus on interest rates offered by the lender because that is the additional cost that they need to bear to receive the money. However, savings accounts work differently. The difference is the flow of money. In a loan, the money moves from the bank to the customer. In a savings account, it is the opposite.

If the flow of money is different, the factors that affect the interest rates are bound to be different too. Where in a loan, factors deciding the interest rate are closer to you such as your credit score, your income, etc. On the other hand, factors affecting savings account interest rates tend to be external. Here are a few examples:

Demand for money

There is a difference between desire and demand. One of the most basic concepts in business is that demand is the combination of desire and the ability to have something. This demand for money gets even higher in a growing economy. For whatever reason, when people want to take money, the rate of interest will be higher.

Just like people, banks have that demand for money too. They need customers to put money into accounts. The more money that customers put in, the better they can operate. Whenever there is a higher demand for money, there will be a higher interest rate involved. Hence, banks can offer higher savings account interest rates when there is money that they can hold.

Supply of money

The simplest way to understand this is that rare things are often more valuable. The same applies to money. It is true that when banks have a demand for money, they offer a higher interest rate on savings accounts. But, if there is less money circulating in the economy, that demand cannot be met by supply.

A lesser supply of money means that savings account interest rates go up. Customers can take advantage of such a situation by opening an account at such times. The only question is whether they have the money to do it.

Fiscal deficit

The word deficit itself means the shortage of something. A fiscal deficit is when the total money that the government spends, ends up being more than the money they have. When they fall short of funds, the government borrows money. Being the biggest borrower in the country, their liability has a major effect on the demand and supply of money in the country. This, in turn, affects interest rates for savings accounts.

The higher the government’s fiscal deficit, the more they will need to borrow. Since, it is the government that is in charge of ensuring a good supply of money, the government itself needing to borrow money means that the interest rates will go up.

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