ECB turnaround: This means an increase in interest rates for savings and loans

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U-turn by the ECB

This means an increase in interest rates on savings and loans.

The European Central Bank is declaring war on the high inflation in the euro area – by raising the key interest rate.

Photo: DPA

The European Central Bank has been pursuing a zero interest rate policy for a long time. In view of the sharp rise in prices, she is now forced to take revenge. Consumers are also affected by this.

Updated: 06/15/2022, 15:55

Hamburg/Hanover. On July 1st, the European Central Bank (ECB) will raise interest rates by 0.25 percent. Banks can no longer borrow free money from the ECB. “Private customer deposits are becoming more interesting again,” says Philipp Rehberg from the consumer advice center in Lower Saxony. How and where will the rate hike affect consumers?

Anyone who believes that interest rates for overnight or fixed-term deposits will rise in the short term is likely to be disappointed. Because, according to Duygu Dahmer from the Institute of Financial Services (IFF), the key interest rate is not important.

“For savings accounts, the reference rate for the ECB deposit facility is more relevant,” she says. In other words, the interest rate that financial institutions have to pay when depositing their customers’ deposits with ECBs. And it has remained unchanged at -0.5 percent for quite some time – so banks continue to offer negative interest rates on deposits.

Rate hikes on saved money will be gradual

According to Asphalt, raising interest rates is a start. “This shows that the ECB wants to end its negative interest rate policy.” Therefore, the interest rate on the deposit facility is also expected to be increased in the coming quarters. Until that happens, deposit rates will not rise for the time being.

Dahmer suspects that in future banks will immediately announce a positive reference interest rate on ECB deposits. Banks have not made any profits in the deposit business for years. Rather, they would have suffered casualties there. “Therefore, the rate hike will be phased in on the money saved by customers,” says Damar.

But even if individual financial institutions prematurely raise interest rates in the deposit business by a tenth, the real interest rate would still be quite negative given the current inflation rate of around eight percent, and there would be an enormous loss of purchasing power.

Dealing with negative interest rates should be relaxed

Philipp Rehberg at least agrees that the banks are now gradually easing the handling of penalty interest on high balances. Several financial institutions have already announced that they will significantly increase the allowance for custody account fees.

Duygu Asphalt predicts that the moment the ECB deposit facility moves into neutral or positive territory, negative rates will fall fully. Because many banks will refer to the negative interest rates of the ECB in the so-called custody fee agreements that they have with their customers.

In the credit sector, interest is passed on

In contrast to interest on savings, interest on loans is likely to continue to rise. “The rising market interest rates are usually passed on directly to the customer,” says Philipp Rehberg. This affects consumers with real estate and overdraft facilities as well as with consumer loans.

Consumer advocates recommend keeping an eye on expensive overdraft facilities and only using them in the event of short-term financial bottlenecks. In the long term, a general consumer loan usually makes more sense.

When real estate loans expire, those affected are now faced with the question of what will happen after the end of the fixed interest period. However, no one can predict with certainty how interest rates will develop in the medium and long term, says Rehberg.

Whether an advance loan – i.e. an initial commitment for follow-up financing at a fixed interest rate – is granted must be decided on a case-by-case basis. Consumer advocates say: “The primary goal should always be to secure financing so as not to jeopardize the protection of assets.”

Interest formation for ten-year loans of more than three percent

According to the Frankfurt-based FMH Financial Consulting, the average effective interest rate for ten-year financing rose above the 3 percent mark for the first time in more than ten years on Wednesday (June 15). Interest rates above 3 percent on ten-year home loans were last seen on April 5, 2012.

The latest rise in interest rates since June 7 was “particularly extreme”, jumping from 2.79 to 3.02 percent in one week. The triggers are likely to be the high inflation and the announcement by the European Central Bank (ECB) that it will raise key interest rates.

FMH founder Max Herbst expects loans to become more expensive for real estate buyers. In April, he considered an interest rate of 4 percent for a ten-year financing at the end of the year to be conceivable. It is now conceivable “after the summer holidays”. Interest rates have risen sharply in recent months. In December, the interest rate for the ten-year financing was still 0.9 percent.

The Munich-based real estate financier Interhype currently sees construction interest rates for ten-year loans at an average of just under 3%. A company spokesman said they were 2.95 percent.

© dpa-infocom, dpa:220615-99-674124/3

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