Yes, please, what is a real interest rate? But anyway, let’s look at the “interest rates”. Will everything be fine now? The ECB is raising interest rates, the banks are raising interest on savings accounts, and the German Michel is finally getting a “return” on his savings again? The money saved can finally multiply again? Yesterday, after 11 years, the ECB finally decided to raise the key interest rate again. In July, it rises from 0.00 percent to 0.25 percent. And in September there will probably be another 0.25 percent on top, but possibly also 0.50 percent to then 0.75 percent of the key interest rate.
Tagesschau mentions that there will soon be interest on savings accounts again
Of course, the Tagesschau yesterday also discussed the interest rate turnaround introduced by the ECB (see video from minute 3:05). All important facts were mentioned. It was also noted as an indication for the citizens that loans could become more expensive and that “there will then be more interest on the savings account”. Nothing more was said about it. Also in the much more detailed reporting In text form, the Tagesschau did not mention an important fact at all, which would have meant quite important information for consumers, namely the real interest rate.
Brutally negative real interest rates make the savings account a loss-making business for years to come
Let’s assume banks that are currently offering 0.00 percent interest on savings accounts would, to put it simply, pass on the ECB’s rate hike 1 to 1 to their savings customers and raise the savings account interest rate to 0.25 percent. Then the savings would indeed increase if you look at the numbers. But in real terms it would still be a dramatic loss. It is about the topic of real interest, which was not mentioned at all by the Tagesschau. Even if there is little time in the 15 minutes of the TV broadcast – one would certainly have had the few seconds to mention that even with savings account interest rates now increasing, the bottom line is that savers are still suffering immense losses!
With inflation currently at 7.9 percent in Germany, according to today’s publication, the Bundesbank expects “over 7 percent inflation” for the average for 2022 as a whole. For the sake of simplicity, let’s take 7 percent inflation and, from September, 0.50 percent interest on savings accounts instead of the previous 0.00 percent. Nominally and purely optically, the savings would grow as a result of the reintroduced interest. But the real interest rate would be a dramatic minus 6.50 percent. After all, if inflation (depreciation) of 7 percent is subtracted from the +0.50 percent savings book interest rate, savers actually lose 6.5 percent of their savings each year (negative real interest rate). The fact that the ECB is now raising the key interest rate eases the pain of the dramatically high negative real interest rate so minimally that it hardly matters at all.
Even the official forecast still sees 4.5 percent inflation for 2023
Just look: According to today’s forecast for 2023, the Bundesbank expects average inflation in Germany to be “only” 4.5 percent. If the ECB were to raise the key interest rate to 1.5 percent in 2023, for example (and the banks implement this 1 to 1), the good small saver would still have a negative real interest rate (i.e. loss) of a whopping 3 percent in their savings account in 2023 The Tagesschau would have liked to have mentioned this topic of the negative real interest rate. Because inexperienced TV consumers who have no financial or economic background could get the idea that it could be worthwhile to accumulate money in the savings account again from now on. Because as the Tagesschau said, there will soon be “interest on the savings account again”.
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