High inflation and low interest rates are a big threat for savers. In the long run, however, inflation can be beaten substantially if we respond to the challenge in the right way.
Savers are generally disciplined. They track their finances, pay their bills on time and regularly set aside part of their income. How unfortunate it is, then, that Europe’s interest rates on savings deposits have been falling for years. On the other hand, inflation eats up most of what is left from interest rates in many countries. Inflation may be low but it’s not as low as rates. Nevertheless, the inflation trap can be escaped if savers position themselves correctly.
Why is inflation necessary?
Price stability is an explicit target for the European Central Bank, but the 2 % target for inflation set by the ECB isn’t popular. What, exactly, is so important about this threshold value?
To answer this question, we need to clarify first why a healthy economy even needs inflation. Technically, the ECB could regulate the economy in such a way that suppresses prices and, accordingly, the inflation target would be set to 0 %. In theory this sounds simple, but in practice it’s barely feasible because inflation control is not an exact science. Even with decisive interference, the real inflation value will always fluctuate around the set target. For instance, when the inflation target is set at 0 %, the fluctuation could actually cause long-term deflation– exactly what the ECB wants to avoid at all costs.
While economic growth represents a number of positives for the society affected, inflation always accompanies it. A positive inflation rate increases prices and thus revenues of companies, and it can also raise wages to a certain extent. Deflation is the other way round though: prices fall as well as corporate income. As a consequence, wage and benefit cuts may follow despite not necessarily being the best strategic option from a socio-political point of view. When cuts are not enacted, deflation can lead to prolonged company bankruptcies and economic failure. As prices fall into negative territory, the relative value of debt, and of interest rates, rise. Just as inflation erodes the value of debt, deflation inflates the value of debt. For this reason, central banks seldom aim for zero % inflation. Instead, as now, the target is a positive number. Meanwhile the low interest rate environment has largely stagnated, leaving savers in a bind.
How savers can deal with declining interest rates
To start beating both inflation and declining interest rates, all that’s needed is to register for free at Raisin. What many don’t know: with Raisin, savers can still get up to 0.77% % interest p.a. on their deposits. The Berlin-based fintech searches for the most attractive interest rates from select partner banks all over Europe and offers those deposit products for people to choose from on a single, convenient platform. Moreover, thanks to European Union deposit guarantee guidelines, savings deposits are secured up to 100,000 Euro per bank, per saver.
The Czech-Slovak bank J&T BANKA, for example, makes an attractive offer with an interest rate of currently 0.60% on 3-year fixed-term deposits. J&T BANKA is a private bank founded in 1992 and headquartered in Prague, with locations in both the Czech and Slovak Republics. The bank is dedicated on multi-generational asset management, lending, investment securities trading and lifestyle management services.
In addition to higher rates like J&T BANKA’s, an advantage of registering with Raisin is short-term time deposit offers. For instance, the Maltese FIMBank pays an effective interest rate of 0.51% p.a. for 3-month term deposits. Euram Bank, headquartered in Vienna, issues 0.30% p.a. for 6-month time deposits. Savings products like these enable investors to counter inflation and choose the right offer from over 90 banks in 28 European countries.