The average return on twelve-month bank deposits is around 0,16%, according to the latest data provided by the Bank of Spain. With a very low interest as a consequence of the decision of the monetary organs of the European Union to lower the price of money in the euro zone. This strategy has meant that this financial product has not been very profitable in recent years. In order to raise it, there will be no choice but to look for some model of impositions that allow exceeding current intermediation margins.
One of these proposals is materialized by deposits in foreign currency, which are those that are contracted in other non-euro currencies. Among them, the US dollar, Swiss franc, Danish krone or even the Japanese yen. While it can allow its profitability, the risks involved in this operation are also higher. Among other reasons because it depends on the exchange of quotation between the selected currency and the euro. And the result is not always the most favorable for the interests of small and medium investors.
These products for personal savings can be formalized at very affordable amounts for all households. From 1.000 euros and onwards, without any restriction regarding this requirement. With terms of permanence ranging from a few days to 36 months, like the most conventional bank deposits. While on the other hand, its subscription mechanics is exactly the same for the other formats.
Currency deposits: conditions
Its difference with respect to the deposits contracted in euros is that in these models it entails a small commission as a consequence of the currency exchange operation. Generally, banks charge between 0,10% and 0,15% on the total amount of the investment. Apart from this fixed payment, it does not incorporate any commission or expenses in its management or maintenance. With the collection of interest at the time of maturity, whatever the term of permanence to which these banking products are directed.
One of the aspects that users consider is whether they are more profitable. A priori this factor cannot be known because it depends on the quote of the chosen currency in the financial markets. In any case, it will not always be positive for this reason and in the worst case it can generate negative interest. This is the main reason to consider this monetary operation risky. Especially if the evolution of these financial assets is unknown.
Is it worth formalizing them?
While on the other hand, it can also happen that the improvement in profitability is not compensate with expenses in the currency exchange. Where there may be some other surprise at the time of its liquidation. However, its great advantage is that you can use a wide range of international currencies. And for sure some of them will have excellent fluctuation in the currency markets.
We must also assess the fact that foreign currency deposits are an unstable instrument for building a savings stock in the short and medium term. Because it is more similar to products derived from equities than fixed income. Not surprisingly, its real profitability depends on the prices in the currency markets. Where volatility is one of its most relevant characteristics, as there are large differences between its maximum and minimum prices. To the point that this class of fixed-term deposits can be very harmful to the interests of savers. At the level of any financial product that does not have a fixed or guaranteed return.
Harmed and benefited
The euro zone is ready to start an interest rate hike from 2020, as the European Central Bank (ECB) has warned in a statement in which it expresses "an upcoming normalization of monetary policy." Right now the price of money in this geographic area is 0%, since these levels were reached in 2015 as a measure to activate the economy of the countries of the European Union. This monetary factor has generated that some banking products are being more favorable to contract than others. Where investors and people seeking financing have been encouraged to the detriment of the interests of savers. Each of them has received a different treatment with interest rates at historically low levels.
The European economies are pending a rate hike that will be made progressively to definitively abandon the trend that money has no value. In any case, this change will vary the relationships that customers will maintain with banking entities since once the new interest rates are implemented, the contracting conditions of personal loans, time deposits and high-income accounts, among others, will change. financial products. Where there will be winners and losers based on this monetary variable. But really, how will they affect the wallet of bank users?
Harmed by the rate hike
People who are in debt and are going to formalize any line of credit from this moment will be the main victims of this economic measure. In the sense that they will be affected by an increase in the interest on the loans and the amount of which will depend on the intensity of the increase in the price of money. In any case, the ownership of a Consumer credit, credit card or mortgage will entail more demanding installments from the increase in the price of money.
A person who has a mortgage loan for a value of 100.000 euros within 25 years with a minimum rate increase, by a quarter of a percentage point, it will mean an increase of around 20 euros in your monthly payment from next year. On the other hand, this scenario will cause mortgage spreads to increase little by little and it will be impossible to contract them below 1%, as could be done through the bank offer until last summer.
Saving will be more profitable
On the contrary, savings products (term deposits, promissory notes, checking accounts, etc.) will come out of the hole in which they were immersed until now due to their low profitability. As soon as the interest rate is higher, their remuneration will increase, without very intense movements but which in any case will be noticed every year in the users' pocket. At the moment, and given the movements in the money market, a bank deposit of 10.000 euros over 12 months has gone from generating a return of 0,14% to 0,20%. Of course, it is not an exorbitant amount but at least it will allow the yield to increase by about 10 euros each year.
In the event that interest rates in the euro zone reach one and a half percentage points, the effects will be more tangible for the holders of these banking products. To the extent that, according to estimates by the Bank of Spain, interest could rise up to very close to the percentage point for money kept in deposits or bank accounts. However, it will be better to forget about yields above 5%, and that occurred before the economic crisis of 2007 and 2008 developed. Where the interest rate was at its highest levels and banks were more receptive to rewarding the customers with exceptional performance.
Impact on equities
Within this scenario, low interest rates such as the current ones are beneficial for investors in the equity markets. Among other reasons, because there is no profitability in other financial products and the only solution is to buy and sell shares on the stock market as a formula to improve remuneration. Although, of course, assuming more risks in operations since there is no guaranteed interest rate. If not, on the contrary, it is at the expense of the evolution of financial markets and where one thing or another can happen. Except for the dividend which is a payment on account that is fixed and guaranteed every year.
While on the other hand, through certain investment strategies, certain goals posed by small and medium investors can be met. For example, buying when resistance is overcome, formalizing operations in uptrends or taking advantage of buying movements. With results that can be very satisfactory for the interests of minorities. On the other hand, there are investment funds that do allow a guaranteed return, with a return on savings of up to 5%. Although with more expansive commissions than in the purchase and sale of shares on the stock market. With an expense that can represent 2% of the total investment made by users. For which you will have to increase the profitability of each of the operations to amortize these expenses in the management.