You may have heard about it more frequently in the media: banks are slowly but surely starting to issue negative interest rates. But what exactly does this mean? Negative interest rates are, as the name suggests, unfavourable interest rates. Usually, banks give interest on deposits of savers. So you get a “goodie” for having your money at the bank. However, interest rates have been drastically reduced in recent years and have now turned into the opposite. So if you have stored your money at a bank, you now have to pay money to the bank instead of receiving interest on savings deposits. The consequence? Your savings at the bank will dwindle over time. 

In the following, we will explain why this happens, what it means and what you can do about it.

Why do negative interest rates exist?

In short, negative interest rates are a consequence of the monetary policy of the European Central Bank (ECB). 

The ECB wants to ensure price stability and prevent money from losing its value. When price levels rise over time, money loses value – you lose purchasing power and get less for your money. In Germany, the Bundesbank typically ensures that this does not happen.

To prevent this inflation, the ECB influences price stability by setting interest rates. Increasing these key interest rates is part of the so-called restrictive monetary policy. This measure makes loans for investments more expensive. As a result, this measure is considered growth-inhibiting for the economy because fewer investments often go hand in hand with lower consumption rates. On the other hand, if key interest rates are lowered, this has a positive effect on economic growth. This is because it makes investment more favourable. 

Due to low inflation, the ECB lowered interest rates. Currently, the ECB’s key interest rate is 0 percent. The interest rate at which banks can hold money at the ECB is even -0.5 percent. This demotivates banks to deposit money with the ECB. Instead, the negative interest rates encourage banks to lend. Lending is supposed to lead to companies investing more. Investing creates jobs. Jobs create economic growth. 

So negative interest rates are fantastic news for people strapped for cash or need money – conditions have never been better for borrowing. But what do negative interest rates mean for savers? First, putting money aside regularly becomes unattractive. This is because savers no longer receive interest on money in their accounts but pay negative interest (also known as penalty interest).

What does negative interest mean for savers?

More and more banks are charging negative interest on account balances – in Germany, there are currently more than 300 institutions. Many Sparkassen and Volksbanken as well as Commerzbank, Deutsche Bank, DKB, ING, Comdirect, and Postbank demand the surcharge for new customers and high sums (mostly over 25,000 EUR). Often -0.5% is charged on the money lying around, even a proud -1% at some banks.

Your bank balance will continuously decrease over time in the current negative interest rate environment. For example, with a penalty interest rate of -0.5% and a balance of 100,000 EUR, you will only have 99,500 EUR after one year. So 500 EUR is just gone – after only one year! That is a rather high account maintenance fee.

Not all banks charge negative interest, and those that do often only charge negative interest on deposits of 25,000 EUR or more, but your money will still decrease over time due to inflation. As a result, your purchasing power decreases over time, even though your account balance remains unchanged. 

What can you do now?

What can you do in an environment where your saved capital is being eaten up bit by bit? First, you should think about alternative asset classes, and instead of watching your money dwindle in your bank account, invest broadly diversified – e.g., with UnitPlus! 

When you invest your “hard savings” in one of the broadly diversified UnitPlus portfolios, it can work for you until you need it. 

That way, it’s also protected from negative interest rates from your bank. You can check out our blog article on active vs. passive investing for an introduction to investing.