The end of saving? Europeans trapped between rising inflation and decreasing interest rates

Interest rates across Europe over the last months have seen a worrying downward trend, continuing to slip fractionally month by month and year by year, largely thanks to the global pandemic’s economic impact. As Europeans sit on their savings (some still anxious about the economy or the threat of redundancy), banks are also hesitating to increase loan activity, meaning ever-larger piles of excess cash on their balance sheets. These are among the chief drivers keeping interest rates low despite the European Central Bank’s stimulus efforts.

At best, consumers can look to mitigate the effects of higher inflation by putting their cash in short- to mid-term fixed-rate deposit vehicles. Current inflation numbers – expected to rise further through the year – ranging from 1.5% (UK), 0.79% (Italy) to 1.24% (France), 1.88% (Netherlands), and circa 2% (Germany and Spain) across the largest EU markets.

Kevin Mountford, the co-founder of Raisin UK, commented: “Most Europeans with savings in the bank (including UK consumers) face the reality of lower or the threat of negative interest rates. Now, with inflation rising above the highest interest rates, their ability to earn a yield from their savings has all but disappeared. There are options for those wanting to mitigate some of these impacts, however. With a decrease in rates across most easy access savings, fixed-rate bonds and notice accounts have seen marginal increases for those looking for a port in the storm. Additionally, with new players entering the savings market consumers should stay alert to banks offering introductory rates.

“Challenger and foreign market banks can offer attractive rates to consumers – but savers must be quick to take advantage of their initial ‘hot’ pricing. In the last quarter, Raisin UK welcomed Ahli-United Bank and İşbank to the platform, with some market-leading rates at the time of launch. Although not traditional, in the sense of having space on the high street, these banks all offer FSCS protected savings accounts. At the height of the pandemic, there was an estimated £2.5bn in savings earning low or no interest consumers need to act fast to avoid losing even more money in the long run.”

Top 1-year versus top 3-year deposit rates in European countries
The spread between top 1- and 3-year fixed-term deposit rates remain narrow, under a tenth of a per cent in Germany and Ireland, and under three tenths in Spain, the Netherlands, the UK, Austria, Poland, and Norway. France and Italy are among the outliers, with 3-year top rates on average over four-tenths of a per cent higher than 1-year top rates.

Top 1-year and 3-year rates
In the UK top 3-year interest rates also increased slightly, along with top 1-year rates – in the UK under one-tenth. France’s top 3-year rate joined the decreasing 1-year top rates: the average of the highest French 3-year deposit offers fell just over one-tenth of a per cent from last month. Germany’s top 3-year interest rate average also slipped but only fractionally.