Bank Deposit Growth to Remain Sluggish Through 2025

Abstract

A January 2022 analysis, "On Point: Deposit Growth Likely Slowing but Abundance of Low-Cost Funding Could Endure Through 2022," noted that after surging in 2020-2021, bank deposit growth would slow sharply. And in fact, after peaking at a 21 percent year-to-year pace in the fourth quarter of 2020, deposit growth decelerated.

This On Point article updates our outlook for bank deposits, given the consensus view through 2025 of declining interest rates accompanied by modest growth in nominal and real GDP and a relatively stable saving rate. Bank deposits typically grow faster when interest rates fall and more slowly when the economy's growth pace is cooling. In most business cycles these two countervailing forces occur at the same time, though historically the rate effect tends to dominate (boosting deposit growth). Given the current consensus outlook, which does not call for either a large decline in interest rates nor a sharp deceleration in economic growth, the historically typical outcome for deposit growth is unlikely to be the case through 2025. According to the consensus view, any decline in interest rates this year and next is expected to be relatively modest, providing little support to deposit growth. Total deposit growth may remain lackluster through 2025, perhaps staying in the 4 to 4.5 percent range. This is well below the pace in previous Federal Reserve easing cycles when deposit growth typically peaked at between 8 and 17 percent.

Author:

Paul Wexler