Where is the interest rate high

Interest rate development

So it goes on with interest

Dirk Eilinghoff
Expert for banks and stock exchanges As of April 27, 2021

Dirk Eilinghoff

As the bank products team leader, Dirk Eilinghoff is responsible for financial investments and old-age provision at Finanztip. He brings experience in this area from his work as an independent financial and fee advisor. In previous years, the historian and business graduate managed charitable projects at the Bertelsmann Foundation and the Körber Foundation.

  • The development of interest rates is mainly influenced by the European Central Bank (ECB).
  • The key ECB interest rate is currently 0 percent. The interest rate at which banks can park money at the ECB is as much as -0.5 percent.
  • The interest rates for overnight money and fixed-term deposits, but also for installment and building loans, are therefore particularly low.
  • There were no interest rate changes at the most recent meeting of the Governing Council on April 22, 2021. Interest rate hikes are not an issue in the foreseeable future.
  • If you are about to take out a loan or want to invest money, there is no need to hurry. The European Central Bank is likely to leave interest rates unchanged for the foreseeable future.
  • However, more and more banks are trying to pass the deposit interest of -0.5 percent, which they themselves have to pay to the ECB, to their customers.
  • You can find further explanations on this in our articles on overnight interest, fixed deposit interest and mortgage interest.

If you want to take out a loan or invest money for the long term, you should always take a look at the current interest rate development and look at the forecasts for further development: Depending on whether interest rates are likely to rise or fall, it can make sense to borrow or Postpone the savings decision a little longer or, on the contrary, hurry up.

Same interest rate development for financing and saving

Anyone who compares the development of interest rates for mortgage interest rates with overnight interest rates or fixed-term deposit rates will quickly see that although the interest rates are different, the development of interest rates is similar for credit and savings products. Basically, the following applies: On average, you receive much lower interest for savings such as overnight money and fixed-term deposits than you have to pay for loans. And installment loans are on average more expensive than construction loans.

We will show you which interest rate development is foreseeable specifically for the individual products:

  • We explain the current interest rate development and interest rate forecast for mortgage lending in our article on mortgage rates.
  • You can find out how the interest rates for overnight money available on a daily basis develop in our article on overnight interest rates.
  • If you can commit yourself a little longer, you should find out about the development of fixed-term interest rates.

The different interest rates can also be seen from the Bundesbank's figures on interest rate developments in recent years. The following graphic shows the course of the interest rates that banks have offered their customers in recent years, on the one hand for construction loans (i.e. as mortgage interest), on the other hand for savings offers with a notice period of up to three months, e.g. for savings in the savings account.

However, the Bundesbank does not set any interest rates itself, but only allows commercial banks to report the current interest rates. From this, it then creates time series on the development of interest rates.

How high the interest rate turns out depends crucially on the amount of money that is available to private individuals, companies and the state in the economy as a whole. The central banks are responsible for managing this money supply, i.e. the European Central Bank (ECB) in the euro area.

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Key interest rates determine the interest rate development

The European Central Bank does not impose any guidelines on the interest rates that commercial banks can charge or pay to their customers. However, with the key interest rate, it determines the interest rates at which it lends money to the commercial banks or they can invest money with them.

Since the commercial banks are in constant communication with the central bank on the basis of these interest rates, the ECB ultimately determines the general development of interest rates and thus indirectly also the development of savings and lending rates for consumers.

An example: For some years now, the European Central Bank has been charging commercial banks with interest for short-term “parking” of money. This negative interest rate is currently -0.5 percent. Since the commercial banks do not pass this negative interest rate on to private savers to a large extent, the savings interest rates are close to 0 percent. You will then usually only receive higher interest rates from banks that want to win new customers with special offers or that currently have to cope with a high demand for credit. The latter then earn the money with the loan customers, with which they can finance higher interest rates for their savings customers.

The development of interest rates in recent years has been generally beneficial for borrowers and disadvantageous for savers: apart from a small interruption in 2011, the ECB has continued to lower interest rates over the past few years. The most important key interest rate, the so-called main refinancing rate, has been 0 percent since March 2016.

The deposit rate at which banks can deposit excess funds in the Eurosystem by the next business day is as much as -0.5 percent.

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Use interest rate developments and interest rate expectations sensibly

If you want to use the interest rate development for your financial decisions, you can try to find the best possible time to get started: So if the European Central Bank is about to make an interest rate decision and an interest rate increase is to be expected, you should do something with the fixed-term deposit waiting.

On the other hand, if you just need money, you should submit the loan application as quickly as possible in this situation in order to benefit from the lower interest rate level. This is especially true for mortgage lending, where the loan amounts are particularly high and the loans run particularly long.

However, such situations in which you can use interest rate decisions by the central bank for you at short notice are likely to be the exception. Most of the time, the interest rate remains relatively constant for a few days or weeks. Then factors such as a comprehensive comparison of the offers of loans or overnight interest rates are much more important than the general interest rate trend. If you have made a good comparison and you know which offer you want to use, you shouldn't hesitate any longer.

On the other hand, the interest rate development becomes important when it comes to how long you want to commit yourself. If you are expecting interest rates to rise, you should think carefully about which investment period you choose. If interest rates are low, it can be cheaper to first opt ​​for a shorter investment period and wait for an increase in interest rates first.

This is shown by the following example: We assume that the investor is faced with the decision to either use a fixed deposit offer over 36 months for a sum of 10,000 euros or to set the amount initially for one year and then after a foreseeable increase in interest rates of 0, 25 percent to conclude a fixed-term deposit over 24 months.

Comparison of a fixed deposit for 36 months and a fixed deposit for 12 + 24 months

 Fixed deposit 36 ​​months Fixed deposit 12 + 24 months 
yearinterest rateInterest incomeinterest rateInterest income
Year 11,1 %110,00 €0,8 %80,00 €
Year 21,1 %111,21 €1,35 %136,08 €
Year 31,1 %112,43 €1,35 %137,92 €
Total interest income 333,64 € 354,00 €

Source: Finanztip calculation (as of April 27, 2021)

In this example, a later investment is a slightly better strategy. However, if the interest rate increase is less or it comes later, the immediate investment can also bring more interest. Overall, it becomes clear that the difference is not particularly large with a low interest rate and an investment amount of 10,000 euros. Here, too, the following applies: the higher the investment amount and the longer the term, the more important the interest rate trend becomes.

The decision about a fixed interest rate of five, ten or fifteen years for mortgage lending is therefore far more important than interest rate developments for fixed-term deposits. The interest rate trend in a home loan and savings contract is just as significant: if interest rates do not rise as expected, the home loan and savings loan loses its most important advantage.

What the current interest rate forecast looks like

In order to cope with the financial crisis of 2008/09, the European Central Bank has gradually reduced interest rates over the past decade. The aim of the central bank was to promote economic growth and bring inflation close to the benchmark of just under 2 percent per year. The most important ECB interest rate is currently 0 percent.

Current interest rates of the European Central Bank (ECB)

Designation of the interest ratesDeposit facility / deposit rateMain Financing TransactionsMarginal refinancing facility
Current interest rate-0,5 %0,00 %0,25 %
Commercial banks can use it to ...Invest money at the ECB overnightBorrow money against collateral from the ECBObtain money from the ECB overnight

Source: European Central Bank (as of April 27, 2021)

Interest rate development for the consumer

While the corona virus briefly hit the stock markets heavily in 2020, the markets for safe bonds have remained relatively stable since summer 2020. Building interest rates fluctuated only slightly in the past few months, by around 0.1 to 0.15 percentage points over ten years of fixed interest rates. For long-term financing, interest rates are likely to remain at this very low level for the time being. If the situation around the corona pandemic calms down a bit, lending rates could rise again slightly. In contrast, there will hardly be any changes in savings rates. As a saver, you should therefore pay attention to special offers from individual banks.

Current measures and decisions of the ECB

At the Council meeting on April 22, 2021, the Governing Council once again confirmed its monetary policy assessment. As the President of the ECB, Christine Lagarde, announced, the Council assumes that interest rates will remain at the previous level or at a lower level "until we find that the inflation outlook in our projection horizon is clearly approaching a level that is sufficiently close to but is below 2 percent ".

Since the ECB President pointed out at the same time that inflation in the euro area was 1.3 percent for the year, interest rate hikes are not to be expected for the time being.

Older interest rate decisions by the ECB

At the council meeting on January 21, 2021, the ECB President made a very similar statement on interest rate developments as it did in April 2021.

Further decisions from the January meeting: The Governing Council decided to continue the purchases under the Pandemic Emergency Purchase Program (PEPP). This has a total volume of 1,850 billion euros. ECB President Lagarde also reported that the ECB intends to continue the net purchases under the PEPP until at least the end of March 2022. In any case, the purchase program should run until "according to the Governing Council's assessment, the coronavirus crisis is over."

As a third point, the Governing Council decided at the January meeting to continue the net purchases within the framework of the asset purchase program (APP) with a monthly volume of 20 billion euros.

On December 10, 2020, the ECB announced that it would increase its purchase program to deal with the corona crisis (Pandemic Emergency Purchase Program - PEPP) by 500 billion euros. This means that until at least March 2022, a total of 1,850 billion euros is available to buy up government and corporate bonds in the EU - and to ensure low interest rates on repayment.

On September 20, 2020, the ECB's Council left interest rates at the existing level. The Council decided to continue the Pandemic Emergency Purchase Program (PEPP), which was expanded by 600 billion euros to a total of 1,350 billion euros in June 2020. This further relaxation of monetary policy is intended to ensure that companies and private households are better supplied with money in the face of the corona pandemic. The purchase program should run until at least the end of June 2021.

The key ECB interest rate will remain at the low level of 0 percent until the inflation target approaches a level that is “sufficiently close, but below 2 percent”. The ECB will offer four additional longer-term pandemic emergency refinancing operations from 2021. These are intended to protect against liquidity bottlenecks and ensure the functioning of the money market during the pandemic.

On March 12, 2020, the ECB Council also left interest rates at the old level. However, the Council adopted a number of measures to improve the EU's commercial banks' access to liquidity. It was announced that the interest rates for the so-called “longer-term refinancing operations” should be 25 basis points below the average interest rate of the Eurosystem from June 2020. The ECB therefore reduced the long-term refinancing of commercial banks and at the same time subsidized the margin for their lending business.

The first meeting under ECB President Christine Lagarde on December 12, 2019 did not bring about any changes in monetary policy. After the second meeting, Christine Lagarde announced on January 23, 2020 that the ECB wanted to review its monetary policy strategy. But there was no change in interest rates.

Up until July 2019, the ECB also issued regular statements on how long it expected to keep interest rates at the current level, for example: “until at least the first half of 2020” (as late as the end of July 2019). Such a statement was no longer found in the statements about the meeting on September 12, 2019. Instead, there was talk of interest rates "staying at their current levels" until there is a "robust" convergence with target inflation of 2 percent. This statement was also found in the press release on the monetary policy decisions of October 24, 2019.

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Conclusion: keep an eye on interest rate developments

For consumers, interest rate developments are, on the one hand, an important basis for economic decisions; on the other hand, individual interest rate decisions by the ECB are hardly predictable, even for experts. Based on the monetary policy goals of the ECB and the announced strategy, interest rates are likely to remain at their previous level for the foreseeable future.

However, it cannot be predicted whether interest rates will ever return to the pre-crisis level of 4 to 5 percent. So it is not certain whether a home loan and savings contract is a profitable business.

The following applies to mortgage lending: mortgage interest rates are currently so low that even a fixed interest rate of 15 years carries hardly any risks. Because in case of doubt, as the borrower, you can terminate the construction loan after ten years of fixed interest rates and repay the current mortgage rates.

More on this in the building finance guide

  • With the right construction financing, home builders can quickly save thousands of euros.
  • Our provider recommendation: Interhyp, Dr. Small, Planethome

To the advisor

Dirk Eilinghoff

Dirk Eilinghoff

As the bank products team leader, Dirk Eilinghoff is responsible for financial investments and old-age provision at Finanztip. He brings experience in this area from his work as an independent financial and fee advisor. In previous years, the historian and business graduate managed charitable projects at the Bertelsmann Foundation and the Körber Foundation.

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