The European Central Bank will raise its key rates in July. And by extension, several savings products could see their rates increase in the months to come. Explanations.
It’s the end of an era. For years, the European Central Bank (ECB) has continuously injected money to support the European economy. But the situation is changing. In May, inflation in Europe reached 8.1%, its highest level since the creation of the euro zone. Result? To stem the rise in prices, the ECB no longer has a choice. On Thursday, June 9, the occasion of the Board of Governors, the institution announced the end of its asset purchase program, as well as a revaluation of 25 basis points of its key rates, effective as of July, 1st next.
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The increase remains measured for the moment. On the one hand to avoid slowing down the economic recovery, already weakened by the loss of purchasing power of households. And on the other hand to avoid putting in difficulty the highly indebted States, like Spain, Italy or, to a lesser extent, France.
Given the level of inflation, key rates should rather be close to 5 Where 6%, estimates the economist Philippe Crevel, director of the Cercle de l’pargne. However, even after the July hike, ECB rates will only be -0.25% for the deposit rate, 0.25% for the refinancing rate, and 0.5% for the marginal lending facility. This change in monetary policy marks a turning point for the European economy. It’s the end of the low interest rate environment that has prevailed for several years, continues Philippe Crevel. Especially since the President of the ECB, Christine Lagarde, has already warned that further rate hikes are planned from September.
The first consequences are already visible: according to the Banque de France, mortgage rates have gone from 1.10% in December more than 1.25% in May. But if rising rates are bad news for certain asset classes, such as stocks, cryptocurrencies, and real estate, traditional savings products could take their toll.
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1. Booklet A
The first winners of the rise in key rates, the Livret A and its false twin, the Livret de développement durable et solidaire (LDDS), should earn you more from 1 August. The remuneration for these booklets had already been revalued last February, going from 0.5 1%. But a further rise seems likely.
Every 6 months, the Banque de France calculates the theoretical rate for Livret A savings accounts based on the arithmetic mean between the change in annual inflation, excluding tobacco, over the last half-year, and the STR, an index based on the interest rates on loans contracted by short-term euro zone banks in euros.
However, if the ECB raises its rates, commercial banks will have to pass on the increase to their own borrowing rates, and the STR will increase, summarizes Philippe Crevel. Conclusion: in a previous article, MoneyVox estimated that the theoretical rate of Livret A would reach 2% this summer.
The Governor of the Banque de France, Franois Villeroy de Galhau, has also confirmed that the Livret A rate will be raised on 1 August. However, he did not specify the amount of the increase. Because it is the government that will have the last word. The Livret A rate is set on a discretionary basis, recalls Philippe Crevel.
2. The Youth Booklet
The Livret Jeune should also benefit from the rise in key rates. And for good reason: its rate, set freely by each bank, must be at least equal to that of the Livret A. If the rate of the Livret A is revalued following the rise in key rates, the floor rate of the Livret Jeune will therefore increase automatically. On average, the remuneration of this booklet exceeds that of the Livret A of 0.50 point 1 point. The HSBC bank, for example, offers a Livret Jeune rmunr 2%.
3. The popular savings account
The rate of the Livret d’epargne populaire (LEP) corresponds to the highest figure between the rate of the Livret A increased by 0.5 points and the half-yearly average of inflation excluding tobacco on a year-on-year basis. However, with inflation 4.8% in April then 5.2% in May, it is doubtless this second figure which will be used to calculate the theoretical rate for LEP.
Result? On August 1, the LEP rate could climb 4.5%its highest level since 14 years old. What may accelerate the adoption of this savings product, often neglected by savers. close to 50% French people are eligible for the LEP. And yet, his detention rate is only 13.3%according to the 2020 report of the Banque de France’s Regulated Savings Observatory.
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4. Bank books
Bank books are not a regulated savings product. Banks are therefore free to choose their rate of return. In April, the average return on these booklets was 0.09%, according to figures from the Banque de France. And after taking into account the tax, these booklets only brought in 0.063%. A historically low level.
However, here again, the rise in key rates could well shake things up. The remuneration of the bank books is directly linked to the rates of the money marketsconfirms Philippe Crevel, for whom the rates for these booklets should increase from next quarter.
Especially since despite their familistic remuneration, the outstanding amount of bank books continues to grow. At the end of March, it reached almost 220 billion euros, i.e. 5 billion more than a year ago. This is a very competitive market, completes Philippe Crevel. And some brands could be tempted to raise their rate quickly to grab market share.
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Rates on term accounts on the rise
In the wake of bank books, term accounts are also benefiting from the rise in future rates. These savings accounts offer more attractive remuneration, subject to blocking your money for a certain period of time, which generally ranges from 3 months to 5 years. The Distingo term account offered by PSA Banque now offers a guaranteed gross annual return of up to 1%. It now even reaches 1.70% on Klarna’s 4-year term account.
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5. The ELP
Since 2011, the Banque de France can revise the rate of the Housing Savings Plan (PEL) every year. For its calculation, the institution relies on the risk-free rates of the European money market, known as swap, chance 2, 5 and 10 years. In detail, the integrated formula 70% the 5-year swap rate and 30% the 10-year rate minus the 2-year rate.
On paper, the rise in key interest rates should therefore lead to a revaluation of the returns provided by the PEL (1% before tax since 2016). If so, the new rate must be published by December 5, 2022 at the latest. However, here again, the government can decide to waive the rule.
Particularity of the PEL: the rate of remuneration is fixed at the start of the contract and does not change thereafter. In other words, only new subscriptions will be affected in the event of a revaluation of the PEL rate. What may be reviving this investment, whose ownership rate has continued to decline since 2016 to reach 19% in 2020.
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6. Life insurance euro funds
The average return on euro funds was 3% in 2011. But after 10 years of decline, it is only 1.30%. Today, the slow tumble of euro funds may be coming to an end. Because the savings placed on euro funds are then invested in equivalent Treasury bonds (OAT), that is to say in government debt securities, explains Philippe Crevel. However, OAT rates are partly correlated to ECB rates.
The anticipation of a rise in key rates is already producing its first effects: on May 15, the 10-year OAT rate was 1.5%. A month later, he is progressing 2.33%. The rise in key rates will only reinforce the upward movement that has already been observed since the beginning of the year on OATs, believes Philippe Crevel.
However, you will have to wait a little longer before noticing a real difference in the returns of your euro funds. A large part of these funds is already invested in old bonds. There is therefore a strong inertiaup and down, continues the economist.
Of new euro funds could, however, see the light of day, in an attempt to capture the current good levels of remuneration of OATs, and offer higher yields. In response, traditional insurers could for their part dip into the reserves of euro funds to prevent the gap with these new funds from becoming too great.
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