Consequences of the ECB’s policy: low interest rates are a burden on poorer households

The era of zero interest rates, in which German citizens have lived for years, has had an impact on their wealth creation. A new study shows: poorer households are more likely to be disadvantaged as a result, real estate owners are the winners.

Low key interest rates within the framework of the European Central Bank (ECB) ‘s monetary policy do not ensure a fundamental redistribution of wealth in Germany, according to a recent study by the Institute for the German Economy (IW) in Cologne. According to the study, however, the ECB’s longstanding policy of mini interest has made it more difficult for people with lower incomes to build up wealth in Germany.

In this group, bank balances and life insurances in particular play an important role in providing for and building up assets. Exactly these investments bring hardly any return due to the factual zero interest rates. “A more difficult accumulation of wealth puts a strain on younger households in particular, if the phase of low interest rates lasts longer,” the authors say. The study examined what consequences the ultra-loose monetary policy of the European Central Bank (ECB) had on the distribution of wealth in Germany via various mechanisms of action.

Real estate ownership benefits

“Our results suggest, however, that some households were able to benefit from the expansionary monetary policy and others not,” said the IW. The winners of the ECB’s low interest rate policy are primarily households that bought and financed real estate in the pre-crisis period. They were able to reduce their exposure to borrowing costs in the phase of falling interest rates. At the same time, they benefit from rising property prices. However, anyone who has acquired a property in the years after the start of the zero interest phase will now benefit less because they have already built up property assets at high prices.

In order to support poor households with persistent low interest rates to build up their wealth, the authors of the study advocate an increase in the employee savings allowance. In addition, the equity culture in Germany must be promoted more consistently. A state pension fund that also invests in shares is also desirable.

However, the study also revealed positive effects of the ECB’s interest rate policy. Because an expansionary monetary policy during a downturn can stabilize the labor market. This is particularly relevant for those countries in the euro area whose unemployment had risen sharply during the global financial crisis and the banking and sovereign debt crisis. In Germany, however, the unemployment rate did not increase so strongly in times of crisis because of the short-time work allowance programs. Therefore, this effect of monetary policy was not so pronounced in this country.