interest rate level
The interest rate level is one of the most frequently mentioned terms when it comes to money at the moment. It is responsible for the fact that time deposits no longer pay off, threatens the classic life insurance, but also ensures that the money is cheap.
At least as long as it is as low as it has been in recent years. But if you take a look at the interest rate level of the last 100 years, you will discover a lot of changes and constant ups and downs. Behind these are mostly political or economic considerations and reacting to situations that can change at any time.
In other words, neither low nor high interest rates are a natural state of affairs, but are subject to human and sometimes controversial decisions.
Who determines the interest rate level?
But who sets the interest rate level and decides on the level of interest?
In Western countries, these are the central banks or central banks that represent an independent authority. For Germany, the European Central Bank (ECB), based in Frankfurt, decides; in the USA it is the Federal Reserve (Fed); in addition, the Swiss National Bank or the Bank of England are considered significant.
It should be noted that the central banks are not solely responsible for the interest rate level, but also for the so-called key interest rate. This is an interest rate that is set unilaterally and applies to bank borrowing. The current ECB key rate of 0.00 percent means that banks can borrow money from the central bank at this rate.
The figure is 1.75 percent in the USA, minus 0.75 percent in Switzerland and 4.20 percent in China, to name but a few examples. Money becomes accordingly cheap or expensive and the central banks thus had the possibility of a partial control of the economy.
What is the impact of interest rates?
The only problem is that the interest rate level does not have a one-to-one effect on the economy or that the effects achieved are not exactly those desired by cheap interest rates.
At present, for example, it is intended to ensure that companies receive cheap loans and invest them in growth. The banks are, however, reluctant to grant loans, and even companies do not demand sufficient money despite the scarcity of interest rates. This means that economic growth cannot be achieved one-to-one.
Critics of the current low-interest policy also complain that persistently low interest rates mean that intervention is no longer possible and that the central banks are losing their influence.
However, low interest rates also have an impact on investors and insurance companies. If you want to invest your money in fixed form or at fixed interest rates, you can only play it safe to the extent that you lose money. The reason lies in the inflation rate, which is also low, but at around one and a half percent above the current interest rate level.
In other words, a bank pays a maximum of half a percent interest, but you have to calculate with an annual inflation rate of one and a half percent. The bottom line is a minus.
A similar problem arises with life insurance policies that have to grant a guaranteed interest rate. This amounts to at present straight still 0.75 per cent, so that also the safest fixed plants slide into the minus and are no longer worthwhile themselves. In the reverse conclusion both shares and real estates experience a proper boom.
Loans for real estates are more favorable than ever and also renovations or reorganizations take place in large style, because it is simply worthwhile itself to invest in concrete gold and not to have the money lying around. It goes without saying that risks arise as a result.
Low interest rates: what to do?
There is a wealth of ideas and advice as to how investors can stand up to the low level of interest rates.
A good risk diversification is important, especially as fixed interest rates are currently not worthwhile or not high enough. This leaves only investments that are associated with certain risks.
This is comparatively low for crowdinvestments. We are talking about a relatively new possibility to participate directly in the success of a company or project and to place even small amounts from 500 euros. If, for example, it is a maritime investment, an interest rate level of around six to seven percent per year beckons, which is indeed worthwhile.
It should be noted, however, that this is a form of entrepreneurial activity and that therefore less collateral exists. So you have to dare a little in order to make a profit if interest rates remain low.
The interest rate level in earlier years
First of all, it is interesting to take a look at interest rates in recent decades, but it is not possible to make any forecasts for the future.
Decisions are always made by people in certain political constellations and cannot be predicted. History never repeats itself, but when you look at the level of interest rates, many experts believe that real interest rates have been falling for centuries.
We are talking about the relationship between interest rates and price increases or the inflation rate, which are negative especially in boom phases. Scientists from the renowned Bank of England have studied interest rates since 3000 BC, i.e. for 5000 years, and come to the conclusion that money has never been as cheap as it is today.
In antiquity, interest rates were high primarily because money lending was not institutionalised. The money was lent by rich private individuals who had to bear the risk alone and therefore demanded high interest rates. In later years, the churches ensured that interest rates did not rise too sharply, but the upper limits were above today’s zero interest rates.
When the first banks such as the Bank of Amsterdam or the Bank of England were established, interest rates remained constant for many years. At the Bank of England, for example, there was not a single change between 1719 and 1822.
In Japan, a low-interest policy has been pursued since 1995, which has not changed to this day, and in this country the enormously low level of interest rates began with the financial crisis of 2008, whereby the key interest rate in the euro zone had never been higher than 4.75 per cent before, and so it was not possible to speak of a high-interest policy.
In 2008 the rate was still 4.25 percent, but it was lowered in steps of half a percent or even 0.75 percent to 0.00 percent since March 2016. Further cuts are quite possible, so that negative interest rates such as in Japan or Switzerland would also be possible.
The interest rate level of the future
One would need the proverbial crystal ball to predict the interest rate level of the future. However, low interest rates were not uncommon in the past and did not lead to an economic catastrophe. Between 1932 and 1951 Great Britain recorded an interest rate level of two percent, the USA between 1933 and 1952 even lower interest rates.
If one takes the length of the periods, which were always around 20 years, to the present time, this would mean a low interest rate level until 2030. In addition, inflation is also quite low, which is due both to technical progress and global competition.
Countries such as Austria have already reacted to the persistently low interest rates and issued bonds with a 100-year maturity. This guarantees an interest rate of 2.1 percent, which is obviously attractive enough to attract many buyers. This is shown by the fact that it is not assumed everywhere that interest rates will rise again in the short or medium term.
Nor does the change at the head of the European Central Bank (ECB) from Mario Draghi to Christine Lagarde suggest that interest rates will rise in the foreseeable future. The commercial banks, however, are always in a position to make their own specifications, but they must observe and accept the current key interest rate in relation to the central bank.
However, if political conditions remain stable, low interest rates could be maintained in the coming years and alternative investments could be in demand, and even if interest rates rise again, it remains questionable whether they will return to pre-crisis levels, i.e. close to five percent.
Fortunately, there is now a wealth of exciting investment opportunities where risks can be minimised by clever diversification. Fixed interest rates and guarantees are a thing of the past, but those who dare and are convinced by projects can secure extremely attractive interest rates.
The interest level is thus low only with regard to the key interest rate and thus the interest rates for time deposits. However, if you take a look at the performance of shares, real estate, maritime investments or crowdfinancing, you may even get results in the double-digit percentage range.
According to some experts, a rising interest rate level would not bring any appreciable advantages for the general population anyway, since around 40 percent of all households in Germany have no relevant financial assets and no money to invest.
Rising interest rates could lead to stagnating wages or a decline in new jobs and are therefore by no means considered desirable. One advantage that the low level of interest rates brings in any case is the money saved by the state, which amounts to a double-digit billion euro amount due to interest that cannot be paid. The infrastructure is also renewed with cheap money, from which everyone benefits.