Savor the Low Rate Wave: How the Eighth Rate Cut by ECB Affects Your Finances
Eighth successive interest rate decrease and its implications for you
Ever heard the boom-bust cycle? Well, the European Central Bank (ECB) isn't interested in the boom part anymore. They've slashed the deposit rate to 2% once again, which might seem like a win for borrowers, but nine times out of ten, it's a blow for savers—here's what it means for you.
Banking's New Normal: Lower Returns for Savers
When the ECB lowers their interest rate, banks receive a smaller sum for the cash they park with the ECB—2.00% in this case.
Analysts from comparison portals have been peering into the tea leaves of this latest cut, and they've considered areas like mortgage financing, savings, current accounts, and installment loans. Let's have a look!
Fixed-Term Deposits
Dive into the time deposit analysis by Verivox. Interest rates on fixed-term deposits began to surge after the ECB decisions in July, September, October, and December 2022, as well as February, March, and July 2023. Owing to the recent 2% inflation rate in Germany, an average two-year fixed-term deposit's real interest rate is now negative.
Banks anticipate future interest rate development and factor it into their fixed-term deposit conditions. As many experts had assumed that the current interest cut phase would eventually subside, the decrease in fixed-term deposit rates has been relatively moderate lately. The phase of inverted yield curves has fizzled out for now—hooray for long-term deposits yielding higher interest rates than those with shorter terms!
If you're seeking a one-year fixed-term deposit with German deposit protection, Klarna Bank offers 2.73% interest according to FMH Financial Consulting, while Haitong Bank provides 2.66% via WeltSparen and the SWK Bank offers 2.40% for the same period.
maximum interest rates for a three-year term currently stand at 2.80% courtesy of Banca Progetto via WeltSparen. The Grenke Bank in Germany offers 2.50%, and if you can keep your savings squirreled away for 10 years, PBB Direkt offers 3.0% interest in Germany, and Redim Capital from Sweden offers 2.85% via WeltSparen.
Installment Loans
Borrowers might still be cursing the relatively high interest rates for savings owing to consumer loans continuing to stay unappealing. As long as fixed-term deposit interest rates remain high, consumer loans won't become significantly cheaper, which is unfortunate for consumers. However, it's always wise to compare offers, as the current range spans 4.99% to 11.83%.
Mortgage Rates
The ECB's decision indirectly affects mortgage rates, with interest rates on 10-year German government bonds serving as the main determinant of yields on covered bonds that banks utilize to finance mortgage loans.
If the ECB manages to keep inflation within a corridor of 2 to 2.5%, mortgage rates should hover between 3% and 3.5%. But fear not, according to expert Max Herbst of FMH Financial Consulting, high US government bond yields might cause German government bond yields to climb, especially if the German state seeks significant funds on the capital market. This may drive mortgage rates up to 4%.
When contemplating a longer or shorter fixed-interest period, ponder which interest rate development you forecast. A short term might be wiser if you anticipate lower rates in the future, while a 20-year fixed rate could offer long-term security if you suspect interest rates to rise.
Household Budget: Overdraft Charges on Checking Accounts
When the going gets tough, people often overdraw their accounts. This practice is often less than ideal, especially when interest rates are high. Overdraft charges might remain unchanged, despite the interest rate reduction, as they are often tied more to bank policies than central bank interest rates. It's essential to remember that an overdraft facility on a checking account is typically the most expensive loan offered by the bank. It should only be used in exceptional circumstances and for a short period.
Community Discussion: This latest ECB rate cut may prompt a conversation about personal-finance strategies within the community.
Financial Planning: Given the negative real interest rate on two-year fixed-term deposits, it might be worth considering investing in installment loans or looking into options such as mortgage financing for potential higher returns. However, it's crucial to compare offers carefully and not overlook the potential impact of overdraft charges on checking accounts.
