Five years of minimum interest on savings accounts: not such a happy anniversary
Most Belgian savings accounts have only had a 0.11% return in the past five years. That is the legal minimum.
Such low interest rates over such a long period are exceptional. To find the cause, we need to go back to 2008. In the wake of the financial crisis, the European Central Bank (ECB) decided to cut interest rates a little at a time. The idea was to boost the economy: having lower interest rates encourages borrowing (by investors and consumers) and discourages savings. In 2016 the ECB even decided to set interest rates to 0.
Saving or losing money?
All people who save money want it to grow. In the worst-case scenario, they want to avoid their money losing value. The past few years have not been kind to savers. The return on most savings has been 0.11% for the past five years; however, inflation has been much higher. Inflation means that life is becoming more expensive: prices at the supermarket, service subscriptions, boiler maintenance, a new kitchen and so on.
If the inflation rate exceeds the interest earned on savings, your money's purchasing power will go down. Put simply, if 20 euros used to get you 15 croissants from your local baker, you can count on having a few less in your bag now. That is what is meant by a decrease in purchasing power.
|Interest on most Belgian savings accounts||Inflation in Belgium (source: Statbel)||Purchasing power of 1,000 euros in savings
(cumulative - result on 31 December)
In 5 years, inflation cut into most Belgians' purchasing power by 7.55% based on their savings. Even those with a savings account that yielded more than the legal minimum return over the past 5 years have lost money. No savings account in Belgium managed to outperform inflation for 5 years.
* provisional figure
When will higher interests on savings return?
The chances of the tide changing in the coming year are virtually nil. The European Central Bank has already announced several times that it will maintain its low interest rates for years to come. If interest rates were to rise in the coming years, they would probably do so very gradually so as not to jeopardise the fragile recovery. The individual banks may also take their time to start raising their interest on savings.
What are the alternatives?
So-called "safe" investments such as (Belgian) government bonds and savings certificates yield virtually nothing. In actual fact, investors in Belgian government bonds are paying negative interest at the moment.
The same applies to quality bonds. Central banks are buying these bonds on a massive scale, meaning their prices are rising (with the yields shrinking as a result).
What about residential property? Real estate has done very well in recent years, but not everyone has enough money to buy a second property to rent. Investing in physical real estate also has its risks.
If you don't want to lose any purchasing power, the only other option is to take a calculated risk and invest in securities. This offers a higher potential return than savings, but is also riskier. The higher the return you want to achieve, the more risk you have to take.
- 1. If you want to select your own shares, bonds and/or other investments, you can. In that case, you need to keep a close eye on your investments and you have to be able to spot certain opportunities and risks.
- 2. Most people do not want to actively follow up on their investments every day. With work or education commitments, family, friends, sports and leisure activities, they often have a busy schedule that does not always involve the stock exchange. In those cases, a periodic investment plan is a simple way to invest in order to achieve a return. This means you invest a certain sum on a regular basis. This can be any amount starting from as low as 25 euros per month. An investment plan of this kind does not require your close follow-up. To find out more about investing in securities
- 3. Another alternative is portfolio management, which means a third party invests on your behalf. You give a dedicated team of investment experts a mandate to start managing the assets you make available (starting at 15,000 euros). This team will make your investment decisions for you based on your risk appetite, which may range from very conservative to very aggressive. This means you do not have to worry about anything.
This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.