Keeping Rates in Perspective

Jolene Hale, Vice President / Commercial Loan Officer, First International Bank & Trust

Economic conditions have continued to evolve as they have always done, and interest rates continue to remain top of mind for both business and consumers.  Business owners looking for a revolving line of credit, (like a consumer credit card), are finding it’s likely that lenders are tying that line to the Prime Rate. 

In the past year, the Prime Rate has been raised eighttimes in less than a year from 3.25% to 7.75% creating whiplash in the market. This is real money when the interest due on your line of credit has more than doubled during that time.

But let’s take a step back for some perspective. The Prime Rate began being tracked in December 1947 and it was at its lowest level of 1.75%, and it increased slightly but stayed low for the next decade. During the sixties and seventies, the rate climbed steadily until it hit its high of 21.50% in December 1980 – kind of makes 7.75% a bargain, right? 

Since that time, it has slowly declined and hit the low of 3.25% in December 2008 and it has held below 4.00% for almost nine years before now slowly climbing again. The point is, rates change with the economic climate and directly impact business owners and consumers as any credit payments they have with a variable rate floats up and down.

“In the past year, the Prime Rate has been raised eight times in less than a year from 3.25 percent to 7.75 percent creating whiplash in the market. This is real money when the interest due on your line of credit has more than doubled during that time.”

Other business loans such as commercial real estate, working capital or equipment loans are typically tied to Treasury rates which also float similarly to the Prime Rate. For example, the 5-year Treasury rate hit a high of 8.77% in April 1990, a low of 0.27% in August 2020 with a current rate of 3.64% in January 2023. The Treasury rates track closely to the Prime Rate and the economic climate.

The Federal Reserve is responsible for controlling the nations’ economy and since they cannot control the supply side of the equation, they try to control the demand side. As a result, they raise rates to slow the demand, and we’ve seen it work in the last year with the housing market.  When mortgage rates were low, home buyers were anxious to lock in a low 30-year mortgage rate causing immense competition on a limited supply of homes for sale.

Here in the Phoenix, AZ market, high home values peaked in October-November 2021 and as rates were increased by 2 percentage points from March to July, the market cooled by the summer of 2022. Homes that were getting multiple offers over the asking price creating bidding wars amongst the buyers are now history, and sellers must accept that the hot selling market has cooled. The good news for buyers means they have a better shot at getting a house, but the bad news is their mortgage rate will be higher, meaning they can’t afford as big a house as they could before the market rise and fall. 

The overall good news for both business and consumer borrowers is that markets have always and will always continue to rise and fall, so if you can be patient just remember that “this too shall pass.”

In conclusion, bank lending rates for businesses and consumers must float with the variable rates driven by the economy and that has been volatile lately. We can hope that rates settle down a bit this year and stay steady for as long as possible.