Saving patterns barely influenced by low interest rates
Deposit rates on savings books and overnight accounts may have shrunk to unprecedented levels but, as the Bundesbank explains in its latest Monthly Report, saving is still rewarding for private investors. The reason? Not just interest rates but inflation rates, too, have fallen to historically low levels.
The inflation-adjusted return on a given investment is known as the real return. While today's real return on savings deposits is poor, and sometimes even negative (effectively eroding the purchasing power of the investor's savings over time), the Bundesbank writes that this phenomenon is not unique to the low-interest-rate setting. In fact, there have frequently been spells in which savings rates were high, but inflation was higher still, pushing the real return on savings deposits into the red.
Broad palette of investments
Returns on bank deposits may be low right now, but the Bundesbank believes that saving is still a worthwhile activity for households to pursue, pointing chiefly to the higher-yielding forms of investment which private investors also tend to have in their portfolio. If real returns are aggregated across the major investment vehicles, write the Bank's economists in the Monthly Report, the real total portfolio return is not as poor as the low nominal rates on bank deposits would initially suggest.
The Monthly Report provides statistical data on the financial assets of households in Germany which show that households have also invested some of their assets in equities, investment fund shares and debt securities. These asset classes may expose investors to more risk, but in some cases they also produce higher returns. Claims on insurance corporations such as life insurance policies are another key component of households' financial assets that have tended to push up the total portfolio return, particularly in times of crisis.
Real returns lower in the past
All in all, households' real portfolio return has contracted significantly since the onset of the financial and economic crisis. Bundesbank data indicate that it dwindled from 3.5% on average between 1991 and 2007 to just over 1.5% between 2008 and the beginning of 2015. "The total return since the outbreak of the financial and economic crisis may be down on average on pre-crisis levels, but since the early 1990s there have been repeated spells in which the real total portfolio return has been far lower," the Bundesbank's economists write.
They explain that there was more to the drop in returns than just the weaker performance of securities during the years of crisis, identifying changes in the composition of households' financial assets as a much more important factor in the inferior total portfolio return. Households, they note, had switched from time and savings deposits such as savings certificates to transferable deposits such as current accounts and currency – investment vehicles that yield lower or even negative returns.
Extreme risk aversion
The Bundesbank writes that the low-interest-rate setting has barely affected saving patterns: "Households continue to save more than 9% of their disposable income – roughly as much as they did in the early 2000s when not just nominal interest rates but inflation rates, too, were perceptibly higher." And yet, the authors note, households' already extreme aversion to risk soared still higher in response to the capital market turbulence triggered by the crisis.
The economists' research finds that real returns are not a major driver of savings and investment behaviour. Over the past decades, key determinants have included not just households' individual risk appetite and preferences, but also disposable income patterns, changes to the tax and social security systems, demographics and wealth levels.
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