As of: March 28, 2024, 5:19 a.m
By: Olivia Kowalak
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Since inflation broke out, banks have had to compete for every customer. While a number of banks are very economical in passing on interest on overnight deposits, others are enjoying record values through tempting offers.
In the summer of 2022, the ECB heralded the end of the historic zero interest rate phase. The key interest rate has now reached a historic high of 4.5 percent since the Lehman crisis in 2008 in order to reduce the inflation that has broken out since the corona pandemic. The ECB's goal is an inflation rate of 2 percent in the euro area. According to the European statistics authority Eurostat, the inflation rate in the euro area was 2.6 percent in February 2024 - for Germany the inflation rate was 2.5 percent. Forecasts from ING, Commerzbank, DZ Bank, SEB and LBBW assume that the ECB will lower the key interest rate in the summer of 2024.
Real returns can be achieved at many banks with overnight money. With the expected interest rate cut by the ECB, a trend towards fixed-term deposits is now emerging © IMAGO / Michael Weber
ECB interest rate turnaround: Banks have to keep an eye on costs
For banks, this means that banknotes borrowed from the ECB are additionally provided with this same interest value. These costs are then added to the loans granted. Inflation, a persistent labor shortage and shrinking demand for credit continue to burden banks on the cost side. “For the future development of lending, European banks are faced with the balancing act of making their balance sheets resilient and continuing to keep an eye on costs,” says Ralf Eckert, Managing Partner Financial Services Germany at EY, about the situation.
However, bank customers should be happy about the increased key interest rates. Because the interest on the overnight money should also rise. According to an interest rate analysis by the comparison portal Verivox, many banks are still showing restraint. As the analysis showed, 21 percent of financial institutions pay no interest or low interest rates of 0.01 to 0.25 percent on saved daily money. This particularly affects regional cooperative banks, such as the local Volks- and Raiffeisenbanken as well as the PSD and Sparda banks. According to the lobby association of the Volks- und Raiffeisenbanken, the reason for this is the large difference between the terms of deposits and loans.
“Of course, regional credit institutions with an expensive branch network cannot offer the highest interest rates in the entire market,” commented Oliver Maier from
Verivox
Finanzvergleich GmbH on the result. “But from the savers’ point of view, it is difficult to understand that in the current, historic period of high interest rates, the vast majority of Volksbanks and savings banks do not even have one percent.”
After attractive daily money offers: The trend towards fixed-term deposits is emerging
Other financial institutions are trying to attract savers' deposits with generous overnight interest rates. The online bank DKB was able to increase deposits by 100 billion euros by paying 3.5 percent interest on overnight money from August 2023 to the end of January 2024. “Some funds flowed to competitors after the end of the campaign, so that our deposit portfolio has currently fallen slightly below the 100 billion euro mark,” said DKB boss Stefan Unterlandstättner to the
Handelsblatt
. Other banks such as Quickborner Bank Comdirect, Openbank or Suresse Direkt Bank have daily interest rates of just under four percent.
However, interest rates for savers have been falling again for several months, which is why experts recommend investing in fixed-term deposits. Many customers have already shifted overnight funds, Unterlandstättner noted the trend reversal: “I expect this trend to intensify when the ECB begins to lower interest rates again.” It will then be more attractive for customers to receive interest rates for several years to secure.
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With fixed-term deposits, money is invested for a limited period of time at an agreed interest rate. At the end of the term, this will be paid out along with the deposit. “German banks currently pay up to 3.8 percent interest on two-year fixed-term deposits. If you compare that with what typical house banks such as savings banks or Volksbanks pay on average, which is 2.2 to 2.3 percent, then that's a difference in interest rates of at least 300 euros for an investment amount of 10,000 euros," explained Ralph Wefer from the comparison portal Verivox compared to the
Tagesschau
.