For some, low interest rates have high cost

By Erin Rhoda erhoda@mainetoday.com
You've probably noticed your savings account earning nearly no interest.

You may have dismissed it if you've never relied on that interest for part of your income. But if you're a retiree, manage a town or otherwise expected to make money off the cash you've saved, you might be asking yourself, "What's the point?"
The country's historically low interest rates are meant to spur economic growth by helping businesses keep their costs down. With more savings, the idea is that those businesses can hire more employees or make new investments.
Low interest rates, however, also have a downside for people counting on some level of return on their bank accounts.
What is playing out across the nation is also true in Maine: Low interest rates are proving bad for savers and good for the few people able to borrow money.
Losing revenue
Norridgewock Town Manager Michelle Flewelling has been dismayed the last several years with bank statements for the town's certificate of deposit.
In 2007 the small community in Somerset County earned more than $38,000 in interest on its undesignated fund balance kept in its account.
By 2010, failing interest rates dropped the return to $3,400.
"We used to get interest revenue. That is one area that's taken the most surprising drop you'd ever think of," Flewelling said.
Norridgewock has since moved its money into a checking account, which earns more in interest than a certificate of deposit.
That account has become irrelevant for municipalities, Flewelling said: "It's not even worth it to look around. They can't offer you anything."
A basic certificate of deposit at TD Bank has an annual percentage yield of 0.40 percent for an 11-month term. Some banks, including Ally and Aurora, are offering higher rates, but only around 1.2 percent.
Making dough
One small business is benefiting from the low rates.
"Certainly higher interest rates would make it harder to pay the mortgage," said Matthew DuBois, who with Michael Hunt co-owns a combined bakery and flower shop in Skowhegan called The Bankery & Skowhegan Fleuriste and Formalwear.
The Bankery is less than four years old but has grown from two to 14 employees and expanded to include the flower shop. Recently it's seen a yearly growth of at least 25 percent, DuBois said.
A 6-percent interest rate on a 20-year loan from Franklin Savings Bank has helped the business, he said, but it's only one part of financial success.
Having a profitable business also lies in following other basic practices to maintain its reputation and quality products, DuBois said.
He and Hunt have set five- and 10-year goals for their business. They ask clients what they want and offer it, and they purchase local flowers or baking supplies when possible. They steadily chip away at loans and credit card debt and only undertake projects when they know they'll be able to finish them.
"We're thankful that we're doing well. If the country continues to improve, hopefully we'll be growing with it," DuBois said.
Rates near zero
Interest rates have been dropping since 2008, but on Aug. 9 Federal Reserve board members said they would continue to hold interest rates near zero for the next two years.
The purpose of having low interest rates is to make it easier for businesses and individuals to borrow money, said Jim Batey, executive director of the Somerset Economic Development Corporation.
It appears, however, that in these "gut-wrenching times," people still aren't borrowing, he said; and people, particularly retirees, who relied on certificates of deposit or savings accounts for some of their income won't make money for awhile.
"It is very difficult for a small business to borrow money for lines of credit, for working capital, because the terms and credit standards are so high that many of them don't qualify," Batey said. "Banks are looking for credit worthiness."
Federal Reserve Chairman Ben Bernanke proposed no new steps to boost the economy in a speech in Jackson Hole, Wyo., on Friday. Instead, he pressed Congress to do more to encourage expansion and hiring.
Good but not great
David Cyr, executive vice president at Skowhegan Savings Bank, has been in the banking industry for 25 years and said he's never seen interest rates so low.
Though the ultra-low rates are meant to encourage borrowing, the current request for loans is flat.
"We're not seeing a lot of increased need or actual purchase transactions, but there's still a lot of refinancing," he said.
Part of the problem is psychological. People are "a little bit hesitant to make a big purchase," he said, mainly because they don't see governments in the U.S. and Europe fashioning a clear plan for their economies.
Without clear national goals, people don't have confidence the economy will improve, he said: "It's as much about psychology and perception as it is to reality."
Still, keeping interest rates low is a better option than raising them, Cyr said. For example, just a 1 percent decrease in an interest rate can help someone purchase a home. "The same dollar can buy a lot more house at a lower interest rate," he said.
Bill Sprague, a real estate agent with Sprague and Curtis Real Estate in Augusta, agreed.
"In our world, interest rates are fabulous," Sprague said. "We haven't seen interest rates this low in almost 50 years."
Interest on some home loans is 4.5 percent, he said, while in the early 1980s, it was as high as 15 percent. In the early 1990s, people thought the 7 percent interest rates were one-of-a-kind, "so these types of rates are almost unheard of," he said.
People are not clamoring to buy up housing, but the market is stable, he said.
"We don't boom as much in the good times, and we don't hurt as much in the bad times," he said. "Our market is not great, but it's good."
Cole Palmer, the revolving loan fund director for Kennebec Valley Council of Governments, based in Fairfield, said the low demand for borrowed money is because of several factors tapping people's discretionary spending: an unemployment rate above 9 percent and higher food and energy costs.
"They're reluctant to borrow because they're thinking if unemployment is so high, my job could be next," he said. "That's really what's driving rates so low."
Erin Rhoda -- 612-2368
erhoda@centralmaine.com