The ECB has raised the key interest rate ten times in a row – and the “old normal” of the financial world is back. Taking out a loan costs money. Savers, on the other hand, can be happy.
Mini-interest rates, low-interest phase, negative interest rates: Andrej Keller from Gießen has taken advantage of the extraordinary times and in recent years has bought a car, television and sofa on credit and, like many Germans, has taken advantage of the zero percent offers from retailers. A few weeks ago, the father of the family had an experience that reminded him of old times. “I was supposed to pay nine percent interest on the new television,” says Keller. He politely declined the offer and then paid for the device in cash – just like before.
For ING chief economist Carsten Brzeski, this is a typical example that the old reality is back. “In the old normal, a loan just costs money,” he explains. Zero percent financing will therefore be seen less and less.
Furniture stores often advertised “zero interest rates”
Furniture stores drummed particularly loudly for this marketing tool during the low interest rate phase. At the Segmüller furniture store in Weiterstadt in southern Hesse, zero percent financing was available for 72 months until the beginning of September, currently just half as long at 36 months.
Managing director Sascha Kaminski expressly remains open to further reductions if interest rates rise further. “In the end, we could even end up with twelve months interest-free again, as we had when it was introduced at the beginning of the noughties,” said the furniture store boss.
Highest key interest rate since the introduction of the euro
If you want to pay for a purchase with a consumer loan, you have to be prepared for higher costs. The average interest rate for a 5,000 euro loan for 36 months has doubled within two years from 3.6 percent to currently 7.2 percent, according to the FMH interest rate comparison.
The trigger for this development is the interest rate change by the European Central Bank (ECB) in Frankfurt. After ten increases in a row, the key interest rate is currently 4.5 percent, which is higher than ever since the introduction of the euro more than 20 years ago.
With the historically strong rise in interest rates, the ECB wants to get high inflation back under control. Because higher interest rates reduce demand. “Borrowing is becoming more expensive,” explains financial expert Brzeski. “This means that people and companies can afford less.” So demand decreases through this mechanism. With the same supply, the price falls, in this case inflation.
Without investment there is a risk of recession
What this looks like in practice can be seen on the hall roof of the Stöckel Werkzeugmaschinen company in Herborn, Hesse. A renovation would cost 100,000 euros, which the family business would have to finance with a loan. “At the current interest rate level, we are deferring this investment,” says Managing Director Felix Kampf.
His customers are also doing the same thing and are now ordering fewer grinding machines from him. The economy is slowed down by the rise in interest rates. From the perspective of ING’s chief economist, the ECB is prepared to pay a recession in the euro area as a price for combating inflation.
Prospects for savers are better than they have been for a long time
Whether private individual or company: If you need a loan, you have to pay more for it. On the other hand, if you want to invest money like pensioner Jürgen Retzel, you can be happy about the rise in interest rates. “For a long time I hoped more than believed that there would be real interest rates again,” says Retzel. He can now choose from various offers of four percent and more. “This is really good again after all these years.”
With current inflation, money is still losing value, but not as much as before. According to ING chief economist Brzeski, the prospects for savers are better than they have been for a long time: the ECB’s latest interest rate increase will be passed on to savers; the inflation rate will fall even further in the coming months. “At the end of the year, German savers will once again receive a positive real interest rate,” is his forecast.
This means that interest rates are higher than price increases, so the value of the money saved increases. The old normal is back: saving is worth it, and borrowing money costs a lot of money.