The recent rise in interest rates and inflation is causing capital market returns to increase, with some banks already offering 4 percent interest on call money accounts. However, this increase does not fully offset inflation, which investors should be aware of.
Investors and savers have seen a positive turn thanks to the European Central Bank’s decision to raise interest rates in the euro zone by 4.5 percentage points since July 2022. This has led to significant shifts in capital market and savings rates, with the yield on ten-year German government bonds reaching above 3 percent for the first time since 2011.
While the recent interest rate hike on the capital market was unexpected, there are many factors that influence interest rates aside from central bank decisions. These factors include inflation expectations, economic development, creditworthiness, and risk environment. Economists predict that rising interest rates in the US will also impact interest rates in Europe to some extent.
The rise in interest rates has had repercussions in other financial markets, with stock indices falling and the price of gold decreasing. Despite some banks offering high-interest rates on call money accounts, inflation in Germany remains high, leading to negative real interest rates. Investors should be cautious and consider the risks associated with higher interest rates.
It is important for investors to understand that returns and risks are interconnected in financial markets. While higher interest rates may offer attractive returns, there is always a level of risk involved. The German deposit guarantee scheme provides some protection but it is essential for investors to be aware of potential risks and to diversify their investments accordingly. Size is not a guarantee of stability as seen in past financial crises where even large banks required state intervention.
Some banks have risk premiums ranging from 50 to 130 basis points but for institutions without corporate bonds this risk measure cannot be calculated accurately. In the worst-case scenario deposit protection of up to 100,000 euros per bank and customer applies in Germany and EU meaning that deposits are protected in case of insolvency but customers may face delays accessing their funds.
In conclusion, while higher interest rates may seem like a positive development at first glance, it’s important for investors
