Banks are boosting interest rates on deposits in an effort to increase the supply of cash available for lending, resulting in what one consultant calls a "national price war," the Wall Street Journal reports. Many banks are pinched between the desire to build up deposits and the shrinking profit margins that come with paying higher interest on those funds. "Where you can really get hurt is on the liquidity side," says one banker.
With the federal funds rate plummeting—it's 1%, and rumored to be headed even lower—deposit rates would normally be dropping as well. But the competition for funds has seen some banks offering CD rates as high as 4.5%; the average rate on a 1-year CD was 2.61% Wednesday, up from 2% in May. The rate war is "potentially quite damaging," says the consultant. "It will be a drag on bank earnings."