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Column on con­se­quences of the low inte­rest rate policy

The ECB: the good and the bad

Low interest rates not only affect insurers’ investments, they are also a disincentive to holding liquid assets, even for consumers. The disastrous long-term effects of current monetary policy are growing increasingly apparent.

If you wanted to put a positive spin on the European Central Bank’s (ECB) monetary policy you could say it drives innovation. After all, the low interest rate policy going back eleven years now and the dovish tone, which has lately grown more pronounced again, have forced large investors to transform their investment approach. Once classic assets such as government bonds or Pfandbriefe, which have traditionally formed a large part of the German bond market, now offer a return that only philanthropists would find acceptable.

That is why even life insurers are forced to redesign their investment approach, even though their long-term business model and regulatory restrictions don’t leave a lot of room to do so. The changes that do happen are remarkable, though. For example, funds are flowing out of government paper and Pfandbrief bonds and into corporate bonds and German Schuldscheindarlehen, a type of bonded loan. Private equity, infrastructure and equities are also more popular than they were five years ago.

Earning interest is basically a thing of the past

Given that interest rates have practically become irrelevant, life insurers performed reasonably well last year with an average return on investment of three percent, as stated in the Statistical Yearbook published this week. The Statistical Yearbook also reveals that a good two thirds of new life insurance takes the form of products with modified guarantees, another innovation adopted by insurers to move with the times.

Companies also need to be creative to preserve their liquid assets, which they might need for covering losses, for example. It no longer makes sense to keep money in money market accounts as banks are increasingly passing on the cost of the punitive ECB deposit rates to their customers.

Even consumers are feeling the pinch. In the region of 30 banks apply penalty interest rates even in retail banking now. Even though these negative rates only apply to higher balances, they send a devastating signal for private retirement provision. Saving is no longer worthwhile. On the contrary, savers get punished. At least, that is how many people see it. Meanwhile, those chronic eurozone spendthrifts accumulate debt as if it’s going out of style. And why not? It costs them practically nothing.

All these developments are consequences of the ECB’s unconventional policy. This is why critics say the ECB promotes lax budgetary policy and kills the savings culture.

Sincerely yours

Jörg von Fürstenwerth

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