Are You AfterReliable Interest Returns on Your Daily Earnings?
Many financial institutions appear to be one step ahead, as they've been decreasing their savings interest rates lately. This has led some to speculate that the anticipated interest rate cut by the European Central Bank (ECB) might have already occurred.
In a span of just eleven days, no less than 14 providers have chosen to lower their savings interest rates. The general assumption among these institutions is that the ECB's key interest rate will drop by 0.25 percentage points, bringing it down from an average of 4.25% to 4%, or from 3.75% to 3.5% in the deposits area.
Notably, savings offers from N26 saw a decrease ranging from 1.26% to 0.25%, resulting in a drop of interest rates to 3% or 1%, respectively. Most banks are now barely offering interest rates above the 3.5% mark. This development is due to banks being able to deposit their customers' savings and current account funds at the ECB daily and earn a 3.75% interest rate as compensation. If the ECB were to actually reduce the deposit rate to 3.5% in September, as suggested by recent interest rate decisions, banks that guarantee 3% interest rates would still make a 0.5 percentage point profit.
Those choosing to switch banks will find that 26 out of 55 banks have provided assurances on maintaining their current interest rates. The duration of these guarantees depends on the bank's offer; good offers provide investors with at least six months of security, while excellent offers guarantee three to four months. These guarantees are set to cushion banks against potential ECB key interest rate cuts to ensure they continue making profits from savings accounts.
However, interested savers might be more concerned with their investment gains than their bank's returns, leading them to question if they should accept lower savings interest rates in exchange for longer guarantee periods, or opt for better-paying but shorter-term investments.
A calculator can help determine which option is the most beneficial. For example, the 4.2% offer from XTB for three months and the equally attractive 3% offer from BBBank for six months can be compared. The subsequent interest rate at XTB after the expiration of the guarantee period for one quarter would need to be only 1.79% for both investments to yield the same. Given this scenario, the longer but less well-remunerated option would be less favorable.
Enrichment Insights
The European Central Bank (ECB) has recently cut its key interest rates by 25 basis points to 2.75%, marking the fifth reduction since the easing cycle began in June 2024. Lower deposit facility rates could make savings accounts less attractive but also increase the appeal of high-quality fixed income investments, such as those in European duration. The ECB's refinancing operations rate and marginal lending facility rate have also been reduced, reflecting the ECB's efforts to provide liquidity and lower the cost of borrowing for banks.
As the ECB continues to reduce interest rates, banks that guarantee 3% interest rates will continue to make a profit. However, those looking to profit from higher interest rates should act promptly, as rate cuts will become more frequent as the upcoming ECB rate decision approaches.
In conclusion, either long-term interest rate guarantees or offers that forgo guarantees entirely in favor of following market trends are recommended at the moment. Providers without interest rate guarantees will likely reduce their unattractive instant-access deposit rates further, blaming the ECB. Meanwhile, the ECB's Transmission Protection Instrument ensures that it can effectively manage inflation and maintain the smooth functioning of monetary policy transmission across the euro area.
Max Herbst is the owner of FMH Financial Consulting, which has been providing independent interest rate information since 1986.
The decision of many financial institutions to lower their savings interest rates might impact consumers, as they now have fewer options for earning a significant return on their savings. In response to the ECB's potential interest rate cut, some banks offer longer guarantee periods for lower interest rates, providing a sense of security for consumers.
