The rise of the interest rate in the euro zone, this is already a reality. The European Central Bank (ECB) raised key rates, also surprising with a stronger than expected increase of 50 basis points, up to 0.5%, to fight against worrying inflation. Now, the pace of increases is uncertain and will depend on how the situation develops. But this is only the beginning of a change in monetary policy stance after many years of official 0% interest rates reversing the conservative savings returns. With the rate relaunch, there is better news for allergy risk profiles.
The scenario is very different and for weeks more attractive remunerations have been observed in pearls and especially in deposits. At present, few national entities have taken up the fight for accountability after long attempts to chase it away. The big bank hasn’t entered the fray yet, but experts aren’t ruling out an offer that could crack the market at any moment and force the competition to give higher yields. In any case, the improvements would be gradual as the deposit facility increases, which is the rate banks pay to have money parked at the ECB and which is at an all-time low of -0.5% since 2019. This Thursday, it rose sharply to 0%.
Inflation and persistently low rates will continue to generate negative real interest rates
Some banks are taking advantage of the end of negative rates to channel savings into fixed income funds, where analysts are starting to see opportunities in the face of juicier valuations. The managers agree that now is a good time to create a portfolio of fixed income securities, with prices that would have bottomed out and higher yields. Ignasi Viladesau, chief investment officer at MyInvestor, points out that what is interesting for the conservative investor is “only in certain sectors and for certain time horizons”. For Juan Gómez Bada, Investment Director and Advisor at Avantage Fund, “the time has come to put our faith again in money market funds with a duration of less than six months, where better returns will be obtained than in accounts or deposits”.
All without losing sight galloping inflation (8.6% in the euro zone) which reduces purchasing power. “We expect real rates, given inflation, to remain negative for a long time,” Gómez Bada says. The consensus predicts that interest rate hikes will bring inflation down to 2% over the medium term, even if they dampen economic growth. “Further increases are coming, probably in 50 basis point increments,” said Paul Diggle of abrdn. “ECB hikes will continue to lag those of other central banks,” said Ben Laidler, global market strategist at eToro. Rates are expected to reach 2% in 2023. From there, some are already predicting declines. “The market is discounting a long period with rates close to the maximum. However, historically, the period between the last rise and the first fall was around seven months,” they point out at ING.
The market discounts that the key ECB rates will reach around 2% in mid-2023
For now, the monetary normalization just started and liquidity in the financial system is still abundant. The situation has nothing to do with that of 2008 and 2012, when wholesale funding markets were closed and Spanish entities had to resort to retail liabilities to balance their balance sheets. Then, the bank came to pay remuneration close to 5%. Today, average rates are still close to 0% and most experts agree that the transfer of rising rates to savings returns will be rather gradual, due to excess liquidity , except for exceptions.
Enrique Lluva, deputy director of fixed income at Imantia Capital, points out that the rise in rates is more noticeable in the value of fixed income assets than in deposits. “Let’s take as an example that our short-term portfolios had a rate of return of 0.30% in October 2021 and are now above 2%, and this is what savers invested in investment vehicles will now benefit from. In deposits it is another story. Financial institutions continue to have very large amounts of liquidity coming from the savings of their depositors and the injections of millions of dollars from the ECB still in force and awaiting amortization (TLTRO). Therefore, the speed of its revaluation will be more closely linked to the actual evolution of rates, ”he assures.
At M&G Investments, they argue that “the best position is to maintain a diversified portfolio across different asset classes, including equities, fixed income, commodities and real assets”.