Banks on interest rate rise: Bring it on!
By all indications, the Federal Reserve will raise interest rates by the end of this year, marking the first time in eight years rates will move north.
While this would signal that the U.S. economy has recovered from the Great Recession while making it more expensive to borrow money, would it presage a slowdown in business?
Not according to Central Massachusetts bankers who are bullish on not only the opportunities that can come with higher rates, but the strength of the local economy and its ability to absorb small rate increases.
By the end of the year, the federal funds rate, which banks use to trade funds with each other, is expected to increase by 0.25 percent from near zero. This will directly affect the prime rate (which runs 3 percent above the funds rate and is used as the basis for other rates, such as those on home equity loans).
“Whatever happens is not going to shake the system,” Commerce Bank President Brian Thompson said. “I don't know what normal is because we have been here for so long, but it isn't going to be 12 percent or 18 percent where it was in the past.”
While an increase could potentially slow growth, since the cost of obtaining loans for business expansion will creep upward with rising rates, the planned rollout of the increases will be so slow and gradual that they won't have a big impact on business decisions, according to Tim Garner, senior vice president of marketing and strategy at Digital Federal Credit Union.
Economy can support it and is prepared
Local bankers are bullish on the opportunity for profits from a wider spread of rates, while many area companies have forecast rate increases into their long-term planning. That's helped by stronger business conditions.
“We have a good economy here in Central Massachusetts. With our colleges and medical facilities … there are a lot of businesses doing well,” Thompson said.
Not only can the economy support rate hikes, Garner said, but they'll serve as an important message to business of the strength of the national economy. This could reinforce growth rather than stifle it, especially at the expected 3 percent rate economists have predicted by 2017, according to a Wall Street Journal poll.
“I think rising rates are really a reflection of a rising economy and inflation,” Thompson said.
“We're always concerned where interest rates are,” said Bryan Blake, president of Calare Properties of Hudson. “It's been something we have anticipated for at least two-and-a-half years.”
Calare owns 15 office, warehouse and manufacturing properties, mostly in New England, and including sites in Devens, Leominster and Framingham. It has anticipated a rate increase and worked it into its planning and financials since it can affect the cost of debt in buying property. However, Blake said, a slow increase in interest rates is not something that will slow down real estate purchases. There's still a lot access to capital, he said, and the property management industry, like many, is about long-term planning.
“We're long-term holders,” Blake said of holding onto a property for 25 years. “At the end of the day we are looking at the best real estate purchase.”
The impact of a small rate jump will be negligible to most consumers and won't dissuade businesses that are benefitting from an improving economy, Garner said.
“Astute businesspeople will understand that while the rates do increase, it is healthy for the economy across the board,” added John Fearing, vice president and senior lending officer at Savers Bank.
For starters, an increase will help the banking industry. With rates at such a low level, they have produced a relatively flat yield curve. But raising rates will allow for a greater difference in interest rates banks charge for loans, and more opportunity for banks to make money. Because of this, banks have been “clamoring” for an increase, said Dave Paulson, head of wholesale banking at United Bank.
Some banks may also view a rate hike as an opportunity to grab market share by maintaining their current low rates. While that could be an option for the short term, it can lead to long-term consequences.
Keeping a short-term teaser rate low could help a bank by pulling in more customers, said Paulson, but allowing customers to lock in a low rate over the length of a long-term loan would come back to hurt the bank because it would cut the potential profit from that loan.
“It's a bit like playing chicken,” Paulson said. “You might win some market share, but you're going to hurt your bank.”
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