Does anyone remember negative interest rates today? It was a previously unknown phenomenon that turned the world upside down for savers, investors and banks in Germany for eight years, from 2014 to mid-2022. Those who brought money to the bank did not receive any interest, as had been the case for centuries – in many cases he still had to pay for it. It’s quite possible that in maybe 50 years people who have experienced this will reap an incredulous shake of the head from their grandchildren when they talk about it.
The phase of negative interest rates came to an abrupt end this year. The reason is that prices are out of control. The inflation rate in Germany rose to more than ten percent, the highest since 1951. The European Central Bank (ECB) has been fighting this since the summer, with interest rate hikes that have never been seen before in such a blatant form. The deposit rate that banks pay to the ECB when they park money with it for a short period of time was still minus 0.5 percent in June. It’s now 2.0 percent, and that shouldn’t be the end of it.
So there are interest rates in Germany again, the era of negative interest rates is definitely over. But what does this mean for savers and investors? Is it a reason to cheer? Are the supposedly good times that Germans have known for many decades now coming back? The times when you didn’t have to worry too much about investments and retirement provision because the bank paid two, three, four percent interest on the savings and the pension was secure. The era of negative interest has seriously unsettled Germans in this regard. When even the money in the bank is running out, what else is there to rely on?
Gone: On Thursday, the direct bank ING announced that it would pay two percent interest on call money, only for four months, but still. Other institutes are likely to follow suit, and the banks’ fight for customers’ savings is apparently starting again. The world is normalizing. In recent years, banks have shown the door to customers who want to bring them money.
In a series over the coming weeks, the SZ will examine the question of what the turnaround in interest rates means for investors in concrete terms: can they invest their savings in fixed-term deposits with a clear conscience in the future? How dangerous are stocks in these uncertain times of war, inflation and economic crisis? Are bonds an alternative? Is life insurance worth it again? And how should home builders and borrowers deal with the fact that interest rates have risen extremely within a short period of time?
Questions like this would be easier to answer if things were like they were after the outbreak of the corona pandemic at the beginning of 2020. There was also extreme uncertainty at the time, and share prices collapsed. But within months, they bounced back, largely as central banks and governments pumped trillions into the global economy. The world for savers and investors remained the same.
This time it’s different: Fighting inflation has top priority because it leads to long-term impoverishment of the population with all the negative social consequences. “Interest rates are back and they will stay longer,” says Ulrich Kater, chief economist at Deka Bank. He expects the ECB to raise the interest rate on deposits from the current 2.0 to 2.75 percent, and according to the latest decisions it could be even higher. He expects an average inflation rate of a good 6.5 percent in Germany next year, and still 2.7 percent for 2024, well above the ECB’s target of almost two percent. “We won’t see an inflation rate of zero to one percent like in previous years for a long time,” says Kater. And that means that the ECB is also likely to keep the deposit rate higher for a long time.
At first glance, this is good news for Germans, who traditionally prefer to put their money safely in their checking accounts, fixed-term and call money or savings products. This did not change significantly even in times of negative interest. Deposits in banks continued to grow steadily, even more so during the Corona period because people did not spend money in the lockdown. It was only this year that growth slowed because inflation ate away at savings. At present, Germans have deposits of 2.7 trillion euros at banks.
On the other hand, it was a bad year for owners of shares and share funds: from the beginning of January to the end of September alone, they lost 189 billion euros, according to Peter Barkow’s consulting and analysis company. That is a minus of almost 13 percent. Private investors currently have around 1.29 trillion euros in stocks and stock funds, i.e. around half of the bank deposits.
The decisive factor for savers is the interest rate after deducting the inflation rate
“The dilemma for investors is that although interest rates are rising again, the capital markets have collapsed more than they have for a long time, precisely because of the higher interest rates,” says Peter Barkow. The stock markets lost three quarters in a row, which is very rare, only in the past few weeks have things started to pick up again.
When there is interest in the bank again and the stock markets are so shaky – can German citizens then invest their money more in overnight and fixed-term deposits with peace of mind? It’s not that simple, as the Munich consultant Nikolaus Braun calculates: “The interest rate after deducting the inflation rate is crucial for savers,” he says. And it is even more negative today than it was when interest rates were negative. A negative interest rate of minus one percent with an inflation rate of two percent means a real loss in value of three percent. With a positive interest rate of 2 percent and an inflation rate of 10 percent, the loss in value is 8 percent. “If you look at the real interest rate, the negative interest rate has even increased,” says Braun. Investors should take this into account when making their decisions. And that means for Braun: Those who invest long-term, for example to provide for old age, will continue to have a broadly diversified share portfolio in the future – despite the turnaround in interest rates.