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The European Central Bank’s monetary policy has many consequences for everyday life. Whether overdraft, overnight money or building financing: How high have interest rates already risen? An overview.
For the tenth time in a row, the European Central Bank (ECB) raised key interest rates last week. All three key rates rose 25 basis points each. But what does this mean for consumers? Where are they feeling the effects of higher interest rates?
Consumer loans
Two of the three key interest rates determine the conditions under which commercial banks can borrow money from the ECB. The so-called main refinancing facility, which applies to terms of one week or more, is now at 4.5 percent – a new record in the history of the monetary union. If financial institutions want to obtain fresh capital in the short term with overnight loans, they now have to pay a top refinancing rate of 4.75 percent.
Because the institutions’ refinancing costs have steadily risen since the end of the zero interest rate policy in July 2022, loans have also become more and more expensive. As a rule, banks pass on their increased costs directly to households and companies in the form of higher interest rates. “The key interest rate is crucial for short-term loans such as overdrafts and also installment loans that are used for a car or new cell phone,” explains Stephanie Heise, head of consumer finance at the North Rhine-Westphalia consumer center, in an interview with tagesschau.de.
According to the Frankfurt financial consultancy FMH, the interest rate for a three-year installment loan is currently an average of 7.19 percent. Depending on the term and the respective creditworthiness, the range even goes up to 10.75 percent. According to the Bundesbank, the effective annual interest rate for consumer loans in new business was recently 8.4 percent. In July of last year it was 6.15 percent.
Overdrafts
“In recent years, people have gotten used to comparatively cheap loans – those days are over,” says Heise. Right now, more and more people are relying on borrowing money due to financial problems caused by inflation. You can also do this by overdrafting your checking account. But the applicable overdraft interest rates are even higher.
According to FMH, the average of 68 selected banks is currently 11.75 percent. “These high interest rates plus repayments are an extreme burden,” says Heise. The consumer advice center therefore recommends that all households that do not rely on it avoid taking out consumer loans and using overdraft facilities at the moment.
From the point of view of FMH owner Max Herbst, overdraft interest rates are hardly relevant for most consumers anyway. “We assume that only one in seven German citizens is in the overdraft.” On the other hand, the interest rates for short-term daily and fixed-term deposit accounts are more important. In other words: saving. Linked to this is the third key interest rate, the so-called deposit facility.
daily allowance
This rate, which the ECB recently increased to 4.0 percent, is used to pay interest on bank deposits with the central bank. The financial institutions had to pay punitive interest rates for years. Nowadays they can make money again by parking their excess liquidity with the ECB overnight. For this reason, they also pay savers something for their savings – for example with daily money. For a current account, consumers currently receive an average of 1.89 percent for an investment of 5,000 euros. In the best case, according to the FMH, it is 4.01 percent.
“The competition for daily money is currently very high,” says Heise. There are always special attractive offers for new customers that bring interest rates of up to 4.0 percent – but usually for a limited period of a few months. “If you don’t find it stressful to constantly open new accounts, you can play the game and get the most money out of it,” said the consumer advocate. Especially if their own bank is one of those that pays hardly any interest, customers should first talk to them, says Heise. “If that’s ineffective, you should think about a new current account and compare providers.”
If a bank does not pass on the rising interest rates to its customers, it risks losing customers due to competition. Almost a third of German financial institutions still pursue a low interest rate policy for overnight money, as a study by the comparison portal Verivox showed. This is also why the holdings of savings banks and cooperative banks fell in the first half of the year for the first time since the financial crisis. FMH expert Herbst suspects that this could lead to a rethink. “If people withdraw their money from other banks because of new customer promotions and the financial institutions notice the heavy loss of customer money, they will probably offer their existing customers better conditions.”
Fixed deposit
In addition to daily money, there are also fixed-term deposit accounts through which savers can receive even higher interest rates: currently between 1.50 and 4.15 percent with a term of five years. Nevertheless, Heise believes investors should be careful. Because: With a fixed-term deposit, you commit to a fixed interest rate for a certain period of time. “It’s no use if there’s an extra percentage point on your fixed-term deposit, but you can’t get it if your car breaks down.” An emergency fund must always be available – ideally in a current account.
As an alternative, the consumer advice center suggests a step-by-step procedure. “We also call this a fixed-term deposit ladder: For example, you put some of your money into a six-month fixed-term deposit account, some into a one-year fixed-term deposit account and the rest into a two-year fixed-term deposit account,” explains Heise. After six months, a reassessment can then be made with a view to interest rate developments. It doesn’t make sense to commit any further into the future. On the one hand, there are hardly any higher interest rates and on the other hand, the uncertainty in the overall economic and political situation is very high.
Regardless of the financial product, Heise suggests dealing with the topic: “If I want to have any chance of at least compensating for some of the inflation, I have to look for a higher interest rate. Otherwise the money is devalued.” Although the real interest rate loss still exists due to the continued high inflation rate of six percent, it is not that high.
Bonds
Investors are also directly affected by the rising key interest rates. Stocks tend to become less attractive; However, bonds have become an alternative again. By issuing bonds, states or companies borrow money from investors for several years and pay interest on it. “Bonds were completely uninteresting for years,” said Heise. The yield on the ten-year federal bond was still negative almost two years ago. That has changed.
The yield on the ten-year government bond is currently 2.7 percent. New investors will receive 2.7 percent per year for ten years – if they hold the product for the entire period. However, the rising interest rates are disadvantageous for investors who already own a bond. “If interest rates rise, the price of my existing bond will fall and I will make a loss if I sell it before the end of the term,” says the expert. The risk of a bond and the development of interest rates during its term are particularly difficult for private investors to calculate.
Herbst therefore advises them against bonds – especially corporate bonds: “The higher the interest rate, the more risk I bear.” If a company goes bankrupt, the bond is lost. “If you haven’t had anything to do with the bond market, it’s better to stay away from it,” says the FMH expert. The opposite movement in returns and prices is particularly complex.
Building interest
The building interest is directly linked to the yield on the ten-year federal bond. For ten-year financing, these were recently just under four percent, like the data from the Frankfurt FMH financial consultancy show. “The building interest rates have very little or nothing to do with the ECB,” explains Herbst. Banks primarily refinance their construction financing via Pfandbriefe. Their return is based on the interest rates on ten-year federal bonds, which in turn depend on the development of inflation.
“In the past two years, building interest rates have quadrupled,” says Heise. Ultimately, the decision to buy or build a property does not just depend on the current interest rate. Nevertheless, it obviously makes the whole thing significantly more expensive. “During our consultations in which we calculate whether the interested party can afford the property, we increasingly find that it is not worth it,” reports the head of consumer finance.