How high can the interest rates be?
The interest is the price for money made available for a limited period of time. The interest amount results from interest rate, running time and Amount of the leased capital. The level of the interest rate mainly depends on supply and demand, the Debtor's creditworthiness, the Base rate and the Purpose of the transfer of money from. It must be regulated by contract or by law. A distinction is made between money market and capital market rates. Money market rates are calculated, for example, for a short-term investment of up to a year, Capital market rates for medium to long-term money lending. The term applies to interest in money trading among banks Interbank rates, base rates are set for financial transactions with the central bank.
What are the functions of interest?
For loans need borrower Debit interest Pay, for investments such as overnight money or fixed-term deposits, savers receive Credit interest. The Compound interest effect This means that the interest is not used up, but invested again and therefore earns interest again. For debtors, interest is an expense; for creditors, income is taxable. Interest is given in percent based on the time interval, for example per year (p. A.) Or per month (p. M.). It serves as a risk premium for the uncertainty that the repayment of the capital is subject to. The more risk the creditor has to take, the higher the interest rate has to be in order to create an incentive to buy this investment. In addition, the interest acts as a Inflation adjustmentwhich is intended to compensate for the loss of purchasing power due to the passage of time. A distinction is made between Nominal and real interest. The nominal interest is based on the amount of interest transferred to the investor's account. The real interest rate is the difference between the nominal interest rate and the inflation rate. This is actually available to the consumer as purchasing power. Only if there is no inflation will there be any real real money left over from mini-interest rates. Furthermore, interest in the form of Interest on arrears as compensation for damages.
Profit problems in the banking industry
The interest is formed by supply and demand on the money or capital market. For years, the ECB has been trying to prevent deflation by lowering its key interest rates and adding cheap money, and that Economic growth to stimulate. The domestic credit institutions incur fewer capital costs due to the low key interest rates. The banks can pass these favorable conditions on to companies, consumers and other customers. Competition is usually a strong factor in banks attracting outside capital. However, this has been distorted in recent years by means of artificially kept interest rates just like the risk perception of investors and borrowers. in the Low interest rate environment If the interest margins of the banks fall, they can no longer submit cost-covering interest rate offers. The tough competition between the institutes leads to higher interest rates on overnight money (current account) and fixed-term deposits than the key interest rate. Investors should keep in mind that instead of collecting interest, they actually have to pay money for it. Banks are therefore trying to compensate for the loss of income from the deposit business with securities and insurance transactions.
Why those Low interest rate policy did not bring the desired success, has many causes. The demand for credit is weak due to high debt levels, a reluctance to invest and asset price increases. Major problems persist on the credit supply side. Bond, stock and real estate markets attract with far higher, currently relatively safe returns. Banks are still struggling to take off problem loans and legal risks Financial crisis. They have to rethink their business models or hold more equity before they can extend large-scale new loans. The legacy of bad loans must either be transferred to the balance sheet or written off. That still limits that Credit growth some banks, especially in the economically weak countries of Europe. In doing so, the ECB must be careful that the expansion of the money supply does not cause inflation to be too high in the future in order to reduce the national debt through inflation. A symbolic rate cut to zero percent would not do much anyway. So far, people shy away from burdening private investors with negative credit interest.
How can investors react to the low interest rates?
The low interest rates can last a lot longer than some investors believe. German savers in particular have been losing a lot of interest for years because they prefer safe investments in monetary values.
Die “Welt” published a study by economists at DZ Bank:
“The subject of the investigation was, in addition to the losses that arise on call money accounts as a result of the decline in interest rates, also the losses that arise from life insurances or through bonds. The results of the calculation show that every German saver between 2010 and 2014 suffered an interest loss averaging around 1,400 euros. Overall, the losses caused by the low interest rates amount to a total of 112.5 billion euros. " (Source: low interest rates cost savers billions)
If German savers were willing to invest in more manageable risks, that would pay off in terms of investment results. Real assets and a broad diversification across all asset classes and maturities help against negative real interest rates. For example, investments in stocks and alternative real estate investments could offset the loss of interest in retirement provision. Real estate remains a stable investment with regular income regardless of price fluctuations. Despite price fluctuations, stocks can bring profitable returns over many years. For this to happen, German savers would not only have to become more willing to take risks, but also more risk-conscious. There is no higher gain without risk. This requires information about the composition, risks and functionality of investments and the exercise of personal responsibility. A profitable investment needs good advice or the courage to make decisions on your own.
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