You’ll soon be paying penalty interest on your savings account!

Is that unrealistic? Scaremongering? No. With increasing probability it will soon become reality. As a German John Doe, as a small saver, you will soon probably pay penalty interest if you have money in your savings account or overnight money account. Already today, this is a reality for most banks for customers with higher money deposits, often several hundred thousand or millions of Euros.

ECB penalty interest for banks

The reason is obvious. For years the ECB has been charging 0.40% penalty interest (negative bank deposit rate). Last year German banks had to pay 2.4 billion Euros penalty interest to the Bundesbank. If banks have more customers’ savings in their books than the volume of credit spent, there is a surplus of deposits. The banks have to pay this penalty interest on this surplus with the ECB (de facto on the spot with the Bundesbank). The banks try almost everything to fire out loans at extremely low conditions, but at some point every customer has a loan that was not quick enough to escape from the bank credit offers.

So far it has been said: Well, we (the banks) save where we can, close branches, dismiss employees, increase account fees for customers, and demand penalty interest from customers with large credit balances. Corporate customers are also usually affected. With these measures, many banks were able to partially offset the ECB‘s penalty interest rate as well as the existing zero key interest rate. Roughly speaking, at the beginning of this year, banks and savings banks were still thinking (in our opinion): “Hey, the end of the zero interest rate phase is slowly approaching, perhaps in a year’s time the ECB will start raising interest rates and the pressure on us banks will then ease again.

Economy in the downturn

But hoax! The weakening economy has put an end to this dream. The ECB actually only has a mandate to guarantee price stability in the euro zone. But it is more than obvious. It now feels compelled to take a full stand against this, and not to let the emerging crisis arise in the first place. Even if the ECB did not cut interest rates last week.

Mario Draghi’s statements were more than clear. They were very unhappy with the current inflation. They would not tolerate the current level. He said this several times, felt 100 times in this Press Conference (here you can read the most important statements). Mario Draghi’s statements actually only allow the conclusion that, firstly, interest rates will fall with the next ECB decision in September and, secondly, that the phase of abolished interest rates or even further negative interest rates will continue for a long time to come!

In addition, the umbrella association of Volks- und Raiffeisenbanken has only recently clearly stated that if zero and negative interest rates persist, the penalty interest rates would probably have to be extended to all bank customers. The Sparkassenverband (Savings Banks Association) from Baden-Württemberg also made similar comments afterwards. Well, but what do you want to do? An appeal from the bank lobby to politicians? The ECB is independent.

Penalty interest for small savings deposits

We can assume that the trend is inevitable. The banks will introduce a series of penalty interest rates also for the normal small saver. Even if we say now perhaps 0.40% negative interest is not so bad. On top of that comes inflation. In Germany this has recently stood at 1.6%. Then the small saver would have an annual real value loss of 2.0% on his deposits. And that times five years at the piece, that sums up! And that’s because the ECB is imposing penalty interest on banks! And why does it do that at all? So that the banks come out on the devil’s end to hand out loans to stimulate economic activity.

But these instruments have not worked for years. So why should even lower interest rates work now? That’s exactly the question a journalist asked Mario Draghi in the Press Conference last Thursday. Answer Draghi: Yes, these measures would have worked out great in the last few years. Our comment: If these measures worked so well, why is the ECB now so dissatisfied with the much too low inflation rate, which is only 1.3% in the euro zone as a whole?

The latest data show that inflation in the euro area could deteriorate even further in the near future. German import prices were reported last week at -2% year-on-year. A violent deflationary step as a leading indicator for consumer prices! The inflation expectations published by the ECB last week after the Press Conference were also lowered further. It is therefore highly probable that interest rates in the Euro zone will continue to fall. And the penalty interest rates on small normal savings deposits will come – at least the probability for this scenario continues to rise!

Mario Draghi. Photo: © European Central Bank 2019

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