This article could also be entitled “how interest rates just became negative”.
The European Central Bank has just cut interest rates, marginally this time, to 0.15%. This is an effort to provide stimulus to business lending. In fact, they also made their deposit rate for banks, -0.1% yes thats minus 0.1%. Effectively banks will have to pay money to the ECB to keep their money on deposit there! This should in theory encourage banks to lend more into the economy.
In reality it is a very small change that may have little effect in countering the threat of deflation, or to encourage banks to invest in business.
What does it mean for investors, or those of you with cash in the bank? Well its bad news since the banks have no incentive to provide its customers with any interest on their cash invested. The banks can borrow from the ECB at the rate of just 0.15% instead.
So where can alternative places for cash be found?
Today, there are several alternatives that do not involve high-risk choices. Equity funds have been performing steadily and European stocks in fact are 7% up this year. Some funds can include capital-guaranteed elements today, and particular corporate bond funds have been providing stable returns and performing better than european interest rates and without much of the equity risk or treasury bond risk for example, for some time.
In reality, money in the bank today is losing ground against inflation (albeit a low headline inflation rate in Europe) and investors need to consider a strategy that realises that taking on some additional risk is required in order to simply earn a return (or some growth) from their investments.
photo credit: 401(K) 2013 via photopin cc
