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Is the ECB “expropriating” savers?

18 May 2015 (updated on 25 August 2021)

Are the European Central Bank’s low policy interest rates a tax on savers? The accusation usually goes as follows: the central bank has lowered the key rate so much that ordinary people can no longer get any interest on their savings. Low interest rates are making loans for borrowers cheaper. And at the end of the day, there is not much left for creditors; the fault lies with the central bank. A study now sets the record straight.

The study shows that it is not the central bank that determines the real income of savers – that is, after accounting for inflation – in the longer term. Rather, the real rate of return on investments over the medium term depends on how resourceful and young the economy is, how good the roads and other infrastructure are, how flexible the labour market is and how growth-friendly government policies are. It is the real economy which generates real returns. The central bank supports this by ensuring price stability, according to the authors of the paper, Ulrich Bindseil (ECB), Jörg Zeuner (KfW) and Clemens Domnick (KfW). Were the ECB deliberately to conduct an inappropriate monetary policy, that could act as an additional brake on the economy, and thus on the long-term earnings prospects for savers.

For all savers in the euro area, economic weakness and the low interest rates that are associated with it are a serious concern. Low returns mean that it takes much longer to save a desired amount. The purchase of a new car may need to be postponed, or more money may have to be set aside in order to attain the same private supplementary pension in old age. But what matters in this context is not how high the nominal interest rate is on the investment. What is much more important is how much the savings return after deduction of monetary depreciation through inflation. The authors of the paper “Critique of accommodating central bank policies”, published by the ECB, point out this distinction. They show that the central bank influences nominal interest rates – i.e. without considering inflation. The decisive real returns for savers, however, depend on real factors, such as innovation, demography and labour markets, say Ulrich Bindseil, Jörg Zeuner and Clemens Domnick.

They write that it is only in the short term – for one or two years – that monetary policy can have a limited influence on real returns. But this short term is not decisive for the vast majority of savers. In the longer term, a restrictive monetary policy in times of economic weakness and low inflation rates is even harmful to savers as the economy is further weakened, and thus also its capacity to achieve higher real returns. In other words, not all interest rate increases are good for savers. Interest rates that are too high in economically weak times can lead to savers receiving somewhat more money for a short time, but in the long term they lose all the more.

Bad monetary policy can trigger instability and disrupt the economy, according to the study. Good monetary policy, however, creates one of the preconditions for sustainable and stable growth. It cannot, however, influence the real returns on investment over the medium and longer term. And even if it could, the ECB’s job is to ensure price stability. To achieve this, the ECB aims for an annual inflation rate of 2%.

The authors of the paper warn that history shows what happens when a central bank abandons this goal and conducts an inappropriate monetary policy without taking account of inflation or the state of the economy. During and immediately after the First World War, the Deutsche Reichsbank, despite the demand shock caused by the war and rising inflation rates, stuck to a key interest rate that was much too low. The upshot was hyperinflation. Germany also experienced the opposite: in the early 1930s, the Reichsbank increased interest rates despite a collapsing economy and sharply falling prices. The result was a downwards spiral and a deepening of the depression.

The paper’s authors, Bindseil, Zeuner and Domnick, conclude that monetary policy cannot point the way out of the phase of low economic growth and the resulting low interest rate on people’s savings. Their proposals include an improvement in the incentives for research and development, provision of better education, faster integration of immigrants into the labour market and improved conditions for private investment. A growth-friendly government policy of this kind can strengthen the real economy. Only that will make it possible, say the authors, for the people of the euro area to expect higher returns on their savings once again.

Updated in August 2021 to reflect the outcome of the strategy review in 2020-21.