ECB return in monetary policy: what main interest rate is important for savers


Status: 07/21/2022 08:46

What many do not know: there is not one basic ECB interest rate, but three. While one is particularly in the spotlight of the media, the other is of particular importance to savers.

Author: Angela Göpfert,

When the European Central Bank meets today, one thing is for sure: European monetary watchdogs will initiate a change in interest rates and raise key interest rates. Plural, not singular: because the ECB has three basic interest rates in its repertoire. However, these three interest rates have very different effects and sometimes have a more, sometimes less direct impact on consumers, savers and investors.

In focus: the main refinancing facility

The media usually focuses on the main refinancing mechanism. This determines the interest rate at which banks can borrow money from the central bank over the long term. The minimum term is one week. Since the financial crisis of 2008, this key interest rate has been exactly zero percent. At the last meeting, the ECB announced an increase in the main refinancing rate to 0.25%. In the meantime, there is even speculation on the market about a large increase in interest rates by 50 basis points.

The following applies: if the main refinancing rate increases, it is not only the costs for the banks that increase. Financial institutions tend to pass on the increased costs directly to consumers and businesses in the form of higher interest rates on personal and corporate loans. This is what the ECB wants.

fight against inflation

The main refinancing instrument therefore has a direct impact on the amount of spending, loans and savings in the currency area. It therefore plays a key role in stopping inflation and controlling inflation expectations.

In view of the record inflation at the level of 8.6 percent. this is also urgently needed in the euro area in june. Inflation in the monetary union is therefore more than four times higher than the ECB’s target. Currency keepers aim for inflation of two percent over the medium term. In the eyes of the ECB, an inflation rate that is too low is just as negative as an inflation rate that is too high.

Highest interest rate – overnight loans for banks

However, the highest lending rate also plays an important role in the fight against inflation. The highest lending rate quantifies the cost at which banks can borrow money from the ECB in the short term, say overnight. As of March 2016, it is 0.25 percent.

The European Central Bank controls the provision of liquidity to the commercial banks with the highest refinancing rates. A low upper lending rate usually leads to an increase in the money supply and an acceleration of money circulation, thus increasing inflation. In the fight against inflation, the ECB is likely to raise this key interest rate by 0.25 percentage points today.

A negative deposit on an escrow account should go down in history soon

The counterpart of the marginal lending facility is the deposit facility with the ECB’s central bank. This means that overnight investments made by commercial banks with a central bank bear interest. If it is positive, the money is earned by banks that “park” excess liquidity in the ECB. However, the deposit rate has been negative since 2014 and is minus 0.5% from 2019.

Banks that fail to transfer excess money as credit or lend money to other banks are therefore penalized by the ECB. Recently, however, monetary regulators announced that they would raise the deposit rate to minus 0.25 percent at their July meeting. By autumn at the latest, the negative interest rate should finally be history.

Savers have been left behind for a long time

This is also good news for savers as their financial institutions have recently asked them to pay more and more. Some banks have transferred negative interest on deposits directly to individual customers in the form of the so-called “Trust Duty”.

Banks’ customers had to pay their bank interest on the balance of overdraft facilities – sometimes as low as EUR 5,000 or 10,000. In anticipation of an increase in interest rates on deposits, many banks have recently announced (soon) a reduction in custody fees or at least an increase in the exemption limit.

Care fee before the end

Some banks, waiting for a change in the monetary policy of the ECB, even abolished completely negative interest rates on deposits. Experts are convinced: at the latest when the deposit returns to zero, penalty interest for savers should be liquidated.

But savers should not be misled by one thing: the real interest rate, ie the nominal interest rate minus the inflation rate, is likely to stay in negative territory for a very long time.

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