Interest rate turnaround: What does the end of the zero interest rate policy mean for investors?
Whether shopping at the supermarket or in the daily press: For months, we have been confronted with the issue of inflation, which repeatedly reaches historic highs. According to the Federal Statistical Office, the German inflation rate in August was 7.9 percent. In the USA, inflation was as high as 9.1 percent in July. A development that affects companies, consumers and investors alike and is likely to keep us busy for a long time to come. Investor legend Warren Buffett once spoke about the inflation rate with the words: “Inflation deceives the bond investor, it deceives the one who keeps his money under a mattress, it deceives almost everyone.” But how should investors prepare themselves against the depreciation of money, which is being fuelled by the ongoing phase of low interest rates?
UPDATE 27.10.2022: In response to rising inflation, the ECB raised the key interest rate again. The ECB is raising the key interest rate by 0.75 percentage points. The deposit rate is therefore 1.50% and the main key interest rate is 2.0%. spring
Interest rates up, inflation down?
Let's first take a look at the beginning of the zero or low interest rate era. Following the financial crisis in 2008, central banks in the USA, Europe and other industrialized countries had to help the economy with massive interest rate cuts. The main goal back then was: commercial banks should be able to refinance themselves more cheaply in order to pass on loans to the economy. Borrowers, (indebted) states, private households and real estate buyers, among others, were pleased with the extremely low interest rate level for many years. The positive However, the effect on the economically significant investment ratio is considered controversial.
However, factors such as the corona pandemic and the war in Ukraine have led to the already mentioned record inflation since 2021, which requires monetary policy countermeasures. Because, of course, the monetary authorities of large industrialized nations such as the USA or Europe are not simply watching money lose more and more in value due to inflation. Instead, leading central banks such as the Fed (Federal Reserve Bank) and the ECB (European Central Bank) are trying to counteract this with monetary policy measures. This includes interest rate hikes. After more than six years of zero interest rate policy in Europe and an ultra-low interest rate phase in the USA since 2008, central banks are tightening interest rates again.
For this reason, the ECB raised the key interest rate by 0.5 percent in July and decided to raise the negative interest rate of minus 0.5 percent for parked assets from commercial banks to zero. An even larger interest rate hike of 0.75 percentage points followed in September, bringing the main key interest rate up to 1.25 percent.
However, the US Federal Reserve Fed is still a few steps ahead of the ECB when it comes to raising interest rates: It raised the key interest rate in July by 0.75 percentage points to the range of 2.25 to 2.50 percent and wants to step up.
The idea behind the interest rate turnaround is that rising interest rates reduce demand over time and lead to price stabilization. Because when interest rates rise, citizens and the economy borrow less money or have to spend more on loans. As a result, growth is declining as companies can no longer simply pass on higher costs to consumers. The hoped-for result: inflation falls. However, if growth slows down too quickly, the USA and some EU states could slide into recession.
Rising interest rates do not compensate for the depreciation of money
Whether the balancing act between an interest rate hike and the simultaneous stabilization of the economy will be successful remains to be seen and could require a great deal of patience and an adjustment of the investment strategy. For one thing, share prices and bond yields are likely to be exposed to turbulence for a longer period of time. On the other hand, interest-bearing forms of investment such as savings accounts or fixed-term deposits are not a profitable asset class in Germany, even against the backdrop of rising interest rates, because inflation will exceed the banks' interest rate in the foreseeable future.
That was how she became Inflation forecast for Europe revised significantly upwards compared to spring forecast. In addition to the sharp rise in prices in the second quarter, a further increase in European gas prices is also likely to be passed on to consumers via electricity prices. As a result, economists surveyed by the ECB expect inflation in the euro area to reach its peak of 8.4 percent (compared to the previous year) in the third quarter of 2022. According to this, the inflation rate could fall steadily and fall below the three percent mark in the final quarter of 2023 both in the euro area and in the EU. At least when the pressure caused by supply bottlenecks and raw material prices eases.
Consequences for savers and investors
In the best case scenario, savings interest rates and inflation rates should be balanced in the medium term. However, high returns are unlikely to be expected from interest-bearing forms of investment until further notice. However, since most Germans still use the current account or savings account as an “investment,” bank customers recorded and recorded Billions of dollars in interest losses.
If you want to build up wealth, you have to choose other options and are driven into riskier investments such as stocks. In contrast to a checking or savings account, securities do at least offer return opportunities. But capital markets have been characterized by high volatility for months, which is likely to persist due to economic policy uncertainty factors.
Real estate as “concrete gold” also stands on clay feet. Because although the Real estate market in Germany considered relatively resistant to crises and offers attractive growth prospects, many investors can no longer afford a real estate loan due to rising loan interest rates.
Investing in the future: with a real assets portfolio
Since On January 1, 2022, construction interest rates in Germany more than tripled. Real estate as a direct investment will therefore probably be affordable primarily for wealthy private investors or institutional investors in the future and therefore does not represent an option for many to build up wealth. This is particularly unfortunate, as properties in the seven German A-cities in 2021 alone double-digit price increases experienced.
The same applies to attractive tangible assets such as collectibles (art, classic cars, luxury watches, fine wine or stringed instruments): Because of the enormous increase in value of alternative investments in recent years, these asset classes are no longer affordable for the majority of private investors.
However, since collectibles in particular form a particularly crisis-resistant asset class due to their low correlation with the financial markets, they should actually have a firm place in every portfolio.
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