• ECB increases interest rates
• Banks bring back interest rates for savers
• Focus on real interest rates
ECB raises interest rate again
For months prevail in the euro zone high rates of inflation, boosted again by the war in Ukraine. In order to remedy the price pressure, the European Central Bank (ECB) followed the example of the US Federal Reserve and heralded the turnaround in interest rates in the summer. With the already third rate hike This year, the monetary watchdogs raised the key interest rate to 2.00 percent at the end of October. Tight interest rates are also affecting the terms on which commercial banks can raise new money from the central bank. And savers and borrowers are feeling the effects too.
Main refinancing rate, deposit rate and top refinancing rate
When talking about the key interest rate of the ECB, the main refinancing interest rate is usually meant. This interest rate defines the conditions on which banks can borrow money from the ECB. If the main refinancing rate is at a higher level, the costs for banks to borrow money against collateral also increase. The borrowers of the institutes must then also expect higher fees. The deposit interest rate, also known as the deposit facility, on the other hand, determines the interest rate at which financial institutions can deposit excess money with the central bank overnight. This is an extremely short-term investment opportunity that allows banks to take advantage of higher interest rates. The prime lending rate describes the conditions under which commercial banks can obtain money from the ECB overnight.
Are savers now coming into play?
Even if the higher main refinancing interest rate means additional costs for banks, thanks to the interest on deposits, the institutes receive a higher share of the money parked at the ECB – an advantage from which the banks’ customers can also benefit. While savers were often punished with negative interest rates in the low-interest environment of recent years, more and more banks are announcing that they want to offer their customers interest on savings. For example, the ING-Bank announced that it would be the first major bank in Germany to bring back interest on call money. The DKB has now also followed suit. Other institutes are likely to follow. “Finally, the turnaround in interest rates is also reaching the savers,” explained Oliver Maier, Managing Director of Verivox. “Depending on the term and market segment, savings interest rates have sometimes doubled or even tripled in a few weeks. In the near future, the interest rate rally should pick up speed and classic savings investments will finally bring more lucrative returns again.” Moritz Felde from the competitor Check24 was also optimistic: “We are currently seeing a clear comeback of classic investments such as call money or time deposit accounts,” said the managing director of the financial service division to the German press agency.
Daily money or fixed deposit?
According to the “Handelsblatt”, a call money account can now be particularly worthwhile for savers who want to protect their money at least partially from inflation, but still want to be able to access it at any time. Although no high interest rates are to be expected here, if the money has so far remained in the account without interest, this represents a good alternative. However, bank customers should carefully study the contract conditions, according to the Wirtschaftsblatt. Details on the term of the interest can be hidden here. The interest rate could theoretically change on a daily basis.
Fixed interest rates, on the other hand, are guaranteed for fixed-term deposit accounts. According to the Handelsblatt, this could be particularly worthwhile for savers who do not want to regularly check whether the money invested is earning the best interest. However, minimum investment amounts often apply here. Some banks also require a simultaneous checking account for a time deposit account.
ECB interest rate decisions arrive at banks with a delay
Savers should still be strategic, warns “t-online“. So the interest rate decisions of the ECB only arrive at the credit institutions with a delay. So if it is foreseeable that there will be further increases in the key interest rate, it can be worth waiting for better conditions long maturities.Otherwise, part of the invested assets could be stuck on terms with lower interest rates.Instead, savers can opt for short-term time deposits with a term of three, six or a maximum of twelve months, as Andreas Jalsovec from “biallo.de” advised .
Since the banks’ savings interest rates are also a voluntary decision, it can also be worth comparing different banks.
Inflation eats away at savings
In addition, it should also be noted that the money invested continues to lose purchasing power in an environment of high inflation rates. For a positive return, the price pressure would have to decrease at the same time. “If the difference between the inflation rate and interest on deposits remains large, inflation will continue to eat up the deposits of savers,” warns the comparison portal Verivox. The real interest rate, i.e. the nominal interest rate minus the inflation rate, remains negative for the time being. The loss of purchasing power is reduced by rising key interest rates, but only to a small extent.
Disadvantages for borrowers
If the banks have to reckon with additional costs for borrowing money from the ECB, these are also passed on to borrowers. The institutes also exercise particular caution when granting loans, as Christina Bannier, Professor of Banking & Finance at the Justus Liebig University in Giessen, explained to the Tagesschau: “When a bank receives an inquiry, it checks the potential borrower very carefully thoroughly and thinks about whether he can afford the more expensive interest and principal payments in the future,” says the expert.
Stock market suffers from high interest rates
According to Verivox, one must also be aware that higher interest rates on credit balances usually have a negative impact on the stock market. Companies also suffer from higher borrowing costs, which in turn reduces their investment potential. This could lead to falling sales figures, which in turn could cause the share price to collapse. The migration of investors from the stock market to overnight and time deposit accounts is also leading to falling demand on the stock exchange, which is also likely to have a negative impact on share prices. According to biallo.de, Robert Halver also stated that “the natural enemy of the stock markets is interest rates”. For a better mood on the stock exchange, inflation must fall, “so that the policy of massive interest rate hikes ends,” said the expert.
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