When an interest rate rises, it can be good and bad. It can be good for investors who make more money on investments with higher interest rates. It can be bad for borrowers who have to pay more money to get the same loan that would have cost less previously. If you aren’t looking for a loan and are interested in growing your wealth, you want to get investments that hold the highest rate of return that you can. Unfortunately, that’s not your savings account, which is historically lower than any other form of investment.
If investors want to keep some liquidity in their holdings, they will have cash on hand. Where they store that cash may differ depending on the interest rate that a financial vehicle provides. If savings offers only 3% returns and CDs (certificate of deposits) offer 4%, the CDs become more attractive and people will move their savings there, as long as they aren’t going to need quick access to that money.
There are other factors besides the interest rate that affects how people save and where they put their money. The amount of risk in a market can make people skittish about investing in a particular segment of the economy. If banks were having a run on their money, investors would not want their money there. However, if the banks can offer attractive interest rates on their savings then these products become very attractive to the risk-adverse customer who will save more money to make more money in the long run.
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Posted by Michael 
December 2007