Higher interest rates bring changes to banking

Interest rates have risen dramatically in recent months. At the start of December, the average national mortgage rate, for example, was above 7% after being just above 3% in January. 

The increase is being felt in the banking industry. 

“It has changed consumer behavior,” said John Hayes, CEO of New Tripoli Bank, and member of the PA Bankers Association. “It has brough CDs – Certificates of Deposit – back into the mix.” 

He said when the rates first dropped, “money wasn’t worth that much,” and consumers stopped looking to investment products like CDs to earn interest. 

“People want to earn more on their investments,” he said. 

Banks are now offering higher interest rates on CDs with most banks offering interest between 3% and 4% depending on the terms. 

Since CDs take the risk out of investment, especially with looming financial insecurity, Hayes said he’s seen a dramatic uptick in bank customers taking out CDs. 

Hayes said it should be noted that the higher interest rates being offered by banks are rolling out slightly slower than the increases in mortgage rates, which is typically how it happens. 

And those increasing interest rates on the mortgage side are slowing mortgage lending. 

“Mortgage activity has slowed significantly even from nine months ago,” he said. “It’s just more expensive to get a loan.” 

That hasn’t impacted the overall residential real estate market, however, because low inventory had already put a slowdown on home buying. 

He said it has been impacting commercial lending as more companies are putting projects on the shelf as they become concerned about the viability of projects with higher material costs and higher interest rates. 

He said banks across the state are seeing less investment on the commercial side in recent months. 

“I have not talked to any bank that’s been as busy as it was even four months ago,” said Hayes. “Honestly the market couldn’t continue to perform at that level over a long period of time.” 

He said the slowdown in commercial lending is just a natural part of the cycle. 

Looking ahead it appears that mortgage rates will continue to rise in 2023, though the Fed has indicated that any interest rate increases would be smaller than those made in 2022.  

If recessionary conditions do hit, that could, however, forestall any substantial interest rate increases. 

Hayes also noted that even though interest rates in 2022 rose to levels consumers aren’t used to, they’re nowhere near historical highs – or historical lows. 

According to the Fed, interest rates in the U.S. reached a high of 20% in 1980 and hit a record low of 0.25 percent in 2008.