Clip Index Update – October 2014's CLIP Index compares mortgage rates and deposit rates every month to evaluate how today's banking conditions suit consumers.
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For the first time since May 2013, the CLIP Index dropped below 4 percent in October. That means consumers are getting a better interest rate deal from banks — but still not a great deal.

By measuring the monthly differential between interest rates for mortgage loans and CDs, the CLIP Index measures the gap between what banks charge consumers to borrow money and what they pay consumers for keeping their deposits at the bank. This gap has been well above average since late 2008, meaning that consumers overall are getting a bad deal. However, there has been some improvement for them lately.

The best deal for consumers in over a year

The CLIP Index for October dropped to 3.98 percent, the lowest it has been since it was 3.48 percent in May 2013. It has now dropped by a total of 42 basis points so far in 2014, with declines in seven of the first 10 months of the year.

These declines in the CLIP rate are due entirely to a steady drop in 30-year mortgage rates. At 0.06 percent, one-month CD rates are still exactly where they were at the end of 2013, and at the same level they were back in May of last year when the CLIP rate was last lower than this.

To put the recent drop in the CLIP Index in perspective, the long-term average (stretching back more than 40 years) for the CLIP rate is 2.86 percent, so at 3.98 percent the current rate is still well above average. So, while overall interest rate conditions for consumers have been improving in recent months, they are still worse than their long-term normal.

Driving the future of interest rates

Where will the CLIP rate go from here? Here are three things that could have a say in that:

  1. Fed policy. The Fed recently announced that it was ending its quantitative easing program, but would keep the federal funds rate near zero for a while yet. By ending a program designed to bring long rates down but pledging to continue to keep short rates low, the Fed may have set the stage for the CLIP rate to reverse course and start to widen again.
  2. Economic growth. This should be the rising tide that floats all boats — and all interest rates. More consistent economic growth should help restore interest rates to more normal levels, and presumably that would mean a more normal CLIP rate as well. The biggest threat is that global economic weakness could start to affect the U.S.
  3. Inflation. This is the wild card. Recent months have seen both a brief spike in inflation and a bout of deflation, so there is no clear inflation trend. Rising inflation could push both mortgage rates and CD rates up, but regardless of whether this narrowed the gap between the two, consumers on the whole would probably prefer that inflation remain a non-factor.

The widening spread between mortgage and CD rates has helped compensate banks for some of the hits they took during the financial crisis. Until the after-effects of that crisis and the Great Recession are completely over, the CLIP rate may remain above average. While this is not a good deal for consumers, the silver lining is that they should benefit from a more stable banking system.

About the CLIP Index

The Consumer Lost Interest Percentage (CLIP) Index measures how much interest consumers are currently losing in the gap between mortgage and deposit rates. To create this index, compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.

It makes sense that mortgage rates exceed the interest rates paid on short-term deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.

The graph on the below represents the arc of the CLIP Index, measured in annual averages, from 1971 to 2013. updates the CLIP Index every month to gauge what kind of deal banks are offering their customers. This gives consumers an opportunity to better understand today’s banking landscape — and how to get the most from it.

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).