Interest rates on fixed-term deposits are falling again – and significantly so. “The days of rising deposit rates are probably over,” explains one analyst. Savers must act quickly or look elsewhere.
As quickly as the nice interest came, it went away just as quickly. This is shown by new data from Barkow Consulting. Accordingly, the average fixed-term deposit interest rates for terms over two years have already fallen to 2.53 percent.
At the height of the new interest rate rush, in November and December, savers received 3.18 percent – in some cases, depending on the bank and the offer, possibly even more. That was still a negative real return based on inflation at the time. In these two months, inflation was 3.7 and 3.2 percent respectively.
But: Inflation is now only 2.2 percent. Anyone who has parked money in a timely manner is likely to actually make a real profit now and for the foreseeable future. All other savers are now faced with a decision: either secure a fixed-term deposit offer now, or look elsewhere for more profitable investments.
“The days of rising deposit interest rates are probably over for the time being,” explains head of consulting Peter Barkow. It has already become apparent that interest rates on fixed-term deposits will fall again. Now this is happening to a “not inconsiderable” extent, writes Barkow in an analysis.
“The interest rates for long-term fixed deposits fell by 0.65 percentage points in the first three months of the year.” In addition, with an average interest rate of 2.53 percent, German banks are “unfortunately at the lower end of the euro area”.
The decline in short-term, strong interest rates is easily explained: inflation is falling in large steps in the euro area, unlike in the USA, for example. The European Central Bank (ECB) will soon have the leeway to lower key interest rates and deposit rates for banks, especially since lower interest rates would help the weak economy – especially in Germany.
The market is therefore expecting interest rate cuts as early as next month. The ECB is likely to act cautiously and reduce interest rates by at most 25 basis points (0.25 percentage points). The monetary authorities may also lower the banks’ deposit rates.
This, and not the “interest rate for the main refinancing transactions” (the general key interest rate), plays the decisive role for the financial institutions. The deposit interest rate is currently 4.00 percent. The difference between this interest that banks collect for excess capital in their ECB accounts and the interest for savers determines the banks’ margin.
Because the banks are already anticipating falling interest rates, they are again stingy with their offers for savers. This applies to fixed-term and daily deposits as well as holders of other savings accounts. Some providers, some in other Eurozone countries, still entice customers with higher interest rates on daily and fixed-term deposits than in Germany.
Nevertheless, this return paradise will not last forever either. In addition, savers usually only receive this interest under conditions, such as opening a checking account or securities account. If you are still hoarding your money in your checking account or savings account, you should decide quickly.
Interest rates of a good 2.5 percent currently bring a real return. It is unlikely that inflation will rise above this level again, at least in the medium term. Just on Wednesday, the “Economists” predicted annual inflation of 2.4 percent for 2024 and 2.1 percent for 2025 in their spring report.
So if you park your money in a fixed-term deposit account for two years, you won’t lose any purchasing power and will even increase your capital a little. But as soon as the ECB starts cutting interest rates, these reasonably good interest rates are likely to disappear.
Economists also warn that although the wave of inflation will soon be defeated, price inflation is likely to settle at a higher level than before the pandemic. This means that rates of almost zero to a good one percent were once a thing. Rates of 2.0 to 2.5 percent are likely to be the norm in the coming years. It is therefore advisable to either buy a fixed-term deposit now or, if you want to build up assets, to look at alternatives such as ETF savings plans.
A possible strategy: Divide the money and invest it for different terms, for example a third for 36 months, a third for 24 months, and a third for twelve months. In this way, savers secure good interest rates for a longer period of time, but remain more flexible with the other thirds and can then either extend the contracts or reallocate the money.