In the fight against the high level of inflation, the European Central Bank (ECB) has sharply raised interest rates since July 2022, increasing the price of money and creating an opportunity, without taking practically any risk, to profitably place money in bank deposits or safe bonds. While waiting for the right moment to invest your funds with the highest possible yield, the question for many is whether the right moment has come or whether to wait for the next increase in rates.
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For now, the ECB has increased the deposit rate to 3.75%. In September, the ECB is expected to raise the rate by another 25 basis points to 4%, which could be the last increase in this tightening monetary policy rate hike cycle. This is also evidenced by future interest rates, which predict another rate increase this year and an interest rate decrease closer to the middle of next year. Of course, the trajectory of interest rates will depend on inflation and other macroeconomic data, but there are many signals that the rate hike trajectory is close to its highest point.
The fact that inflation could continue to decrease is indicated by such factors as the slowdown in global trade, as well as the fall in prices in China, which could further “export” this deflation to the rest of the world. Supply chains have stabilized, but OPEC countries continue to cut oil production to stabilize oil prices. All of these indicators and many more are increasingly pointing to a reduction in economic activity and hence price pressures, which means that headline inflation should also continue to decline.
Although inflation falling to 2% does not mean that the ECB will immediately cut interest rates to 0%, it will be a signal that the ECB may begin to gradually reduce them. It might seem that if the interest rates will not decrease until the middle of next year, but will be increased this September and who knows, may increase even more, then you can still wait until they reach their highest point and then invest your money at maximum interest rates.
However, it must be taken into account that in the financial world, money is lent and borrowed at the interest rates that financial market participants expect in the future, not at those currently displayed on the central bank’s website. Therefore, in order to deploy their funds at maximum interest rates, financial markets need to anticipate the right moment when central banks are close to the end of their restrictive monetary policy cycle. All indications are that this will happen in the coming months. Which means it’s high time to deploy your spare cash.
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One of the possibilities to safely and profitably deploy your funds is the well-known term deposits, or deposits. In addition to the fact that this instrument is as simple as possible, its safety is guaranteed by the legislation of the European Union, setting a guarantee amount of EUR 100,000 in each bank in all EU member states (in Latvia, it is determined by the Law on Deposit Guarantees).
If bank deposits do not seem attractive, financial markets and the opportunities they offer come to the rescue. When buying government or corporate bonds, it is possible to lend your money to borrowers with different degrees of safety and for different time periods.
Unlike a time deposit, when buying bonds, you have the opportunity to sell them at any time while keeping the earned interest, however, you must remember the market price risk – because if the bond holder wants to sell them before the maturity date, their market price may be lower than the price that would be necessary to a given investment would yield the expected return. Of course, closing the deposit early also comes with penalty interest, so it is wise to choose bonds whose maturity corresponds to the planned investment horizon.
The main bond measure in the euro currency is German government bonds. Currently, it is possible to receive around 3.5% by investing in one-year bonds, around 3% annual yield by investing in two-year bonds, 2.8% annual yield on three-year bonds and 2.5% annual yield on five-year bonds ( Data for August 25). Although it doesn’t sound like much, it should be noted that Latvian residents do not have to pay income tax on income from EU member state and municipal bonds, unlike income from time deposits.
As the German government is the safest borrower, this means that their bond yields are also the lowest. Therefore, it is possible to find other issuers and create a portfolio with a higher yield, at the same time reducing the risk on one particular borrower and increasing the overall portfolio price stability. Bank clients can choose bonds independently or entrust the creation of such a portfolio to the bank’s specialists, who will deploy the funds as safely and profitably as possible, as well as help avoid costly mistakes.
In any case, regardless of what is more binding for everyone, term deposits or investments in bonds, now is the right time to make your savings earn safely.
2023-08-31 15:00:04
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