Anyone hoping for a big drop in commercial lending rates this year should find Nika Cataldo’s story in this week’s issue sobering.

As her interviews with bank CEOs and strategists show, lenders will likely find themselves stuck in an uncomfortable place for much of 2024.

Customers have been trained to expect high deposit interest rates, and many have become reacquainted with how to shop around for the best deals on certificates of deposit, money market accounts and other high-yield products.

This means that, even as the Federal Reserve’s benchmark interest rate falls, any bank that choses to keep the rates it offers to depositors high will likely be able to attract more money to their vaults.

In turn, this will keep bankers watching their backs and reluctant to lower their own deposit rates, lest a competitor steal these all-important funds. This same stickiness on high deposit rates means there’s only so far any one bank can lower its interest rates in the direction of something borrowers can actually afford before that bank eats too far into its already-shrinking profit margin.

Could a banker try to shoot the moon with a volume play? It’s possible, in theory. If one or two financial institutions still have healthy net interest margins, they might have enough leeway to try and undercut competitors on the price of their loans.

Despite fears of a recession this year in more than a few quarters, there’s substantial pent-up demand for debt from developers and others who’ve seen their plans put on ice or thwarted entirely for the last 18 months.

But reasons to fear a recession are very real – just look at how the state’s revenue take has missed projections each month for the last six months – and no banker wants to be caught out if the music does indeed stop, and a project conditioned on a solid economy suddenly finds itself without enough demand to keep up with debt payments.

It still remains to be seen whether or not the economy worsens this year, but it’s certainly not a given that credit will flow as freely as pronouncements that the Fed has achieved its mythical “soft landing.”

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