What the ECB’s interest rate policy means for savers


For years now, savers’ money has had a rather meager existence. While conservative investment strategies hardly yield anything, share prices and real estate prices keep climbing to new heights. How the ECB’s interest rate policy influences the money and capital […]

For years now, savers’ money has had a rather meager existence. While conservative investment strategies hardly yield anything, share prices and real estate prices keep climbing to new heights. How the ECB’s interest rate policy influences the money and capital markets and what effects this has on your savings account or your retirement provision.

The starting point of the interest rate policy of the European (ECB) Central Bank is economic development in the euro area. The economy should be buzzing, but the price level should be stable and the inflation rate at a certain level. In order to get closer to this goal, interest rates can either be raised or lowered.

The ECB has three instruments at its disposal: the main refinancing rate – commonly referred to as the base rate, the deposit rate and the marginal lending rate. They determine the conditions under which commercial banks can either obtain money from the central banks or invest it. They thus provide an orientation function for the money markets and have an indirect steering effect on the capital markets, i.e. the prices for bonds, share prices, but also property prices and the euro rate. (Read more: The Central Bank’s Interest Rate Instruments.)

What are the effects of raising or lowering the key interest rate?

Interest rate hike: The increase in the key interest rate points the way to a restrictive, i.e. restrictive, monetary policy. If the economic situation is usually good, the aim is to counteract an excessively rapid rise in the inflation rate. Raising interest rates increases lending rates, which means that borrowing money becomes more expensive. On the other hand, the credit interest increases, savers get more money. In contrast to stocks, there is greater demand for bonds on the capital markets.

Rate cut: By lowering the key interest rate, the ECB is pursuing an expansive monetary policy. Borrowing money from the central bank will be cheaper. This is also reflected in the banks’ credit conditions. The aim is to create an investment incentive for companies and to encourage consumers to consume in the form of consumer loans and thus to stimulate the economy. On the other hand, if loans become cheaper, credit interest rates decrease. Savers get less for their investment. Since bonds hardly yield anything, investors are increasingly investing in the stock market or in real estate.

What dangers lurk in cheap money?

For years the central banks have been trying to get the economy going with cheap money and at the same time to fuel inflation. However, in the long term, the ultra-loose monetary policy harbors the risk of upheavals in the financial markets: Bubbles can form on the stock or real estate market, for example, as prices inflate beyond a healthy level. Economists have been warning the ECB for some time to leave the course of the open money locks.

What is negative interest and what does it mean for my savings account?

For some time now, the term “negative interest” has also been making the rounds. For example, some banks have already introduced a negative interest rate for their investments for companies or even savers with higher savings. But what is it actually: negative interest?

Commercial banks currently have to shell out a negative interest rate of 0.40 percent when they park money at the ECB. While the ECB would like to encourage the banks to increase their lending, they are considering passing on this amount – also known as a penalty interest rate – to their customers. This in turn is intended to increase the incentive for bank customers to prefer to spend their money instead of keeping it in their savings account.

Small savers are not yet affected by this step. But it seems only a matter of time before so-called penalty interest is charged on the savings of small investors. According to a survey by the Bundesbank and the financial supervisory authority BaFin, every twelfth institution wants to charge negative interest rates on deposits from private customers in the future. Since the banks are losing their income because of the low interest rates, they pass the costs on to their customers and turn the fee screw. In the future, one or the other saver will also be confronted with penalty interest on their savings.

What consequences does the ECB’s interest rate policy have on savings accounts and overnight money?

Investors and savers should keep an eye on all three interest rates. While the key interest rate shows the direction of monetary policy, the marginal lending rate (upper limit) and the deposit facility (lower limit) show the corridor in which overnight money, for example, moves. With this orientation, investors can assess and compare the offers of the banks.

In general, savers continue to have to put up with measly or no interest rates for overnight money, savings accounts, etc. But that’s not all: Since the days of near-zero inflation have long been over, savers are even losing money on balance. In Germany, annual inflation was 1.7 percent in December 2017, the EU average 1.4 percent.

A fundamental course correction is not expected for a long time despite the improved economy in Europe. A turnaround in interest rates, however timid it may be, is not expected before 2019. But even then, it would still be years before the rate hike actually hit the savings account. Because even then, inflation eats up interest.

Are retirement plans at risk?

The persistent phase of low interest rates is also tearing gaps in the classic vehicles for old-age provision. Conservative investment strategies, which should serve to build up long-term wealth, hardly yield anything. These include savings bonds, bond funds and life insurance policies.

Life insurance companies must adhere to their promised interest, the guaranteed interest rate, but this has been depressed more and more in times of the financial crisis and low interest rates. While the guaranteed interest rate when taking out life insurance in 1997 was four percent, twenty years later new customers only get 0.9 percent. One thing seems clear: Owners of high-interest old contracts should not be persuaded by their provider to terminate their contracts. And the young will have to take more risks on the capital markets in future or simply spend their money.

Swell:– own research– dpa