Fed up with poor bank deposit rates and looking for a way round them? Many people are asking the question; why are bank deposit rates so low?
It all comes down to a very low base rate set by the European Central Bank. The key responsibility of the ECB is to maintain price stability within the Euro area. The ECB will, therefore, set monetary policy (interest rates and the money supply) for all those countries that are part of the European single currency.
The ‘rub’ with the Euro zone is that the ECB must set one rate for all the different countries. That rate is set by the Governing Council of the ECB who meet twice a month to discuss it. It is this extraordinarily low rate that has a ‘knock on’ effect of making saver’s deposit rates low.
Inflation in the Euro zone currently runs at around 3%. If you are getting 2% from having your money on deposit, you end up with a -1% net (after inflation) return. If you are liable to Box 3 tax, in The Netherlands, you end up with a -2.2% return.
If you had EUR 200,000 on deposit, you would, therefore, be losing around EUR 4,400 a year from your capital in real terms. Compounded over five years, you would lose the equivalent of12% of your original capital or, in monetary terms, EUR 24,000. All of a sudden, leaving money on deposit doesn’t seem quite so low risk after all does it?
Is there a solution? Yes, there is. There are many funds and investments you can make use of that work over a time period of 12-60 months offering zero volatility and fixed rates of return. Some of these funds/deposits may be based in areas of the world where interest rates are higher and thus give investors, in other currencies, access to a higher rate of return.
A good example are funds based in Australia which benefit from higher interest rates, high levels of investor protection and regulation (Australia being one of the toughest financial regulators) and highly stable banking regimes. If you were investing Euros you’d still invest in Euros, however, the fund would have an arrangement to ‘hedge’ the Euro against the Australian Dollar – so no volatility but a potentially higher level of fixed return.
So, in short, it is possible to get your savings to work harder for you and produce a better return than simply leaving them to languish on deposit, whilst keeping volatility to a minimum.
However, these solutions to wealth management are not so likely to be found on the high street but within the Independent Private Financial Advice arena. If you would like to discuss such investment solutions, AES International offer a no obligation fee-free initial discussion.
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