Interest rates higher than inflation
Savers’ luck could quickly evaporate
December 31, 2023, 10:40 a.m
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While inflation has already fallen sharply, interest rates are relatively high. This meant that, at least on fixed-term deposits, the interest rates were above the inflation rate for the first time in a long time, meaning that savings at the bank actually increased. But a trend reversal is already becoming apparent.
After years of dry spells, millions of savers will benefit from increased interest rates on a larger scale for the first time in 2023. “2023 was a good year for most German savers,” says Oliver Maier from the comparison portal Verivox. However, it seems questionable whether interest rates for overnight money etc. will continue to rise in 2024. There are already signs of a reversal in the trend for fixed-term deposits.
In 2023, savers benefited from the European Central Bank’s (ECB) unprecedented series of interest rate increases in the fight against high inflation. The interest of credit institutions in savers’ deposits grew again. The financial institutions make money by collecting more interest on loans than they pay savers. However, according to an analysis by the Deutsche Bundesbank, banks and savings banks initially took more time than before to pass on interest to savers. Since September 2022, interest rate transmission has been even slower than in the past, the experts wrote in the June edition of the Bundesbank’s monthly report.
Inflation has now eased. This has consequences for overnight money and the like. “Due to the falling inflation rate and the weak economy, the pressure is increasing on the monetary authorities to lower the key interest rates for the first time in the first half of 2024. The banks are already pricing this into their fixed-term deposit conditions,” explains Maier. After rising until November, fixed deposit interest rates have now fallen slightly again.
When it comes to overnight money, the comparison portal, which evaluates the interest rates of around 800 banks and savings banks, is not yet observing any falling interest rates across the board. Maier expects that things are unlikely to go up from now on. The deadline for the evaluation was December 18th; experience shows that there is little change in interest rates around Christmas.
Fixed deposit interest rates are on average higher than inflation
Since the beginning of 2023, the average interest rates on the current account, which savers can access at any time, have almost quadrupled from an average of 0.46 percent to 1.70 percent with offers available nationwide. Depending on the credit institution, the interest is paid monthly, quarterly, semi-annually or annually.
According to the evaluation, savers currently receive an average of 3.30 percent interest for fixed-term deposits with a term of two years at financial institutions operating nationwide; at the beginning of 2023 it was still 2.17 percent. Interest rates are now above the inflation rate of 3.2 percent. Fixed-term deposits with average interest yield slightly higher returns than the money invested loses in value due to inflation.
Savings are invested in a fixed-term deposit account for a specific period of time. Savers cannot access the money during this time, which is why the interest rates are usually higher than with overnight money. At the end of the term, the money invested flows back with interest.
Credit institutions that are active nationwide face greater competition and therefore often compete for savers with higher interest rates. Although savings banks and cooperative banks have also increased interest rates, many regional credit institutions are lagging behind, according to the evaluation. Savings banks recently paid an average of 0.60 percent on overnight money – less than a quarter of what investors receive on average at banks operating nationwide. For the regional cooperative banks it is slightly less at 0.59 percent.
Concern about savings bank DNA
Regional institutions also offer less on average for fixed-term deposits. With an investment amount of 10,000 euros, over a period of two years, according to calculations by Verivox, this means 195 euros less interest income at savings banks and 173 euros less interest income at local Volks- und Raiffeisenbanken as well as the PSD and Sparda banks. “Many savings banks and Volksbanks trust that their customers will not change banks even if they could earn significantly more interest elsewhere,” explains Maier.
Sparkasse President Helmut Schleweis, who retired at the turn of the year, warned in October not to scare off customers with savings interest rates that were too low. In times of rapid interest rate changes, it is impossible to immediately pay high interest on all existing deposits. “But if we leave the impression that we no longer reward thrift, then that eats away at our DNA of being an institution for saving.”