In the past years I have written several blog posts about the savings account behavior of the majority of Belgian people. Below blog posts date from january and april 2017.

Read about collective (stupid) behavior of the Belgian population

Saving Belgian has no appetite for risk …Our reflection

Has anything changed since that time ? What is the current economic outlook impacting your savings account ? Do you understand the impact of economics and interest rates on your savings account ?

 

1. The BIG Picture

Early July 2019 the following headline “Long term interest rates going Negative !” appeared in the Belgian news site.

Interest rates are typically assumed to be the price paid to borrow money. For example, an annualized 2% interest rate on a $100 loan means that the borrower must repay the initial loan amount plus an additional $2 after one full year. On the other hand, a -2% interest rate means the bank pays the borrower $2 after a year of using the $100 loan, which is counterintuitive. While negative interest rates are a strong incentive to borrow, it is difficult to understand why a lender would be willing to provide funds considering the lender is the one taking the risk of a loan default. While seemingly inconceivable, there may be times when central banks run out of policy options to stimulate the economy and turn to the desperate measure of negative interest rates.

KEY TAKEAWAYS YOU SHOULD UNDERSTAND

  • Negative interest rates are an unconventional monetary policy tool.
  • Negative interest rates are a drastic measure revealing that policymakers fear that Europe is at risk of falling into a deflationary spiral.

Negative Interest Rates in Theory and Practice

Negative interest rates are an unconventional monetary policy tool. They were first deployed by Sweden’s central bank in July 2009 when the bank cut its overnight deposit rate to -0.25%. The European Central Bank (ECB) followed in June 2014 when it lowered its deposit rate to -0.1%. Other European countries and Japan have since chosen negative interest rates resulting in $9.5 trillion worth of government debt carrying negative yields in 2017, according to Fitch. Negative interest rates are a drastic measure that shows that policymakers are afraid that Europe is at risk of falling into a deflationary spiral. In harsh economic times, people and businesses tend to hold on to their cash while they wait for the economy to improve. But this behavior can weaken the economy further, as a lack of spending causes further job losses, lowers profits, and reinforces people’s fears, giving them even more incentive to hoard.

In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money at a central bank. Additionally, negative rates charged by a central bank may carry over to deposit accounts and loans. This means that deposit holders would also be charged for parking their money at their local bank while some borrowers enjoy the privilege of actually earning money by taking out a loan.

Another primary reason the ECB has turned to negative interest rates is to lower the value of the euro. Low or negative yields on European debt will deter foreign investors weakening demand for the euro. While this decreases the supply of financial capital, Europe’s problem is not one of supply but of demand. A weaker euro should stimulate demand for exports and, hopefully, encourage businesses to expand.

In theory, negative interest rates should help to stimulate economic activity and stave off inflation, but policymakers remain cautious because there are several ways such a policy could backfire. Because banks have certain assets such as mortgages that, by contract, are tied to the interest rate, such negative rates could squeeze profit margins to the point where banks are actually willing to lend less. While negative interest rates may seem paradoxical, this apparent intuition has not prevented a number of European central banks from adopting them.

For example the world’s longest experiment with negative interest rates may end up lasting an entire decade in Denmark. Not until 2021 at the earliest will Danes have a chance to see positive rates again, according to Danske Bank. The country’s policy rate first dropped below zero in 2012. Nowhere else have people lived with negative interest rates as long as in AAA-rated Denmark. The policy has protected the currency peg, but it’s also turbo-charged the mortgage market and pushed those trying to save money into riskier assets. Meanwhile banks have done a bit less traditional lending and a lot more wealth management.

Personally I think that Europe has entered uncharted monetary territory, and I agree with a number of analysts that warn that negative interest rate policies could have severe unintended consequences. See the Belgian 10 Year Interest rate chart.

Why is interest rate so low ? 

The main reason is the economic growth. With current trade war tensions between China and the USA, the world economy is slowing down and a recession may hit soon. Also the ECB policy is a reason. European banks can deposit their extra savings account money at the ECB at a negative interest rate but it is better to give a company or a person a loan at a cheap rate. That’s why real estate and pushing people to more loans is today popular. Create more DEBT !

So far ECB has add 2.6 billion euro in the financial system to stimulate the economic growth since the financial crisis of 2018.

2. Why you will get 0% (soon) on your savings account

The Belgian savings account is legally set to a minimum of 0,11%. So that means that banks lose money on every euro you save on your savings account. So what’s starting to happen ?

The CEO of the bank ING, Erik Van Den Eynden, pledges for ZERO % on your savings account. Several banks have started to lobby with the government to lower this 0,11% interest rate for your savings account.

The overarching lobby organization Febelfin understands the statement and says that profit margins of banks have become too small.

3. Final Words

Never was the interest rate on your savings account so low and what does the average Belgian person do ? He added more and more to his savings account. Now in total 278,4 billion euro !! So Belgians are losing 4 billion BUYING POWER as a result.

If you only “invest” or save money in your savings account, you will only lose money. In september ECB will lower the rates even more. My opinion is that it will REMAIN SO LOW or even become NEGATIVE WITHIN THE NEXT 5 YEARS. Is there an alternative ? Sure. You can put a monthly amount in a world index fund. An example is the MSCI World index tracker. Find more information on this website MSCI World

Don’t think about it. Just do it !

This is the end of this blog post.

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Source : VRT News , De Tijd, Investopedia

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One Response Comment

  • Christian Delgrande  June 6, 2020 at 2:11 am

    Hello There. I found your blog using msn. This is a really well written article. I’ll make sure to bookmark it and come back to read more of your useful information. Thanks for the post. I’ll certainly return.

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