The interest rates on the money and capital markets – the rates that banks charge each other on interbank lendings – are low at the moment and continue to fall even further. The downward trend in interest rates on the money and capital markets is one of the factors causing rates at banks to fall. ABN AMRO’s decision to lower interest rates on customer savings effective 30 September is a reflection of this movement.
Why are savings interest rates falling?
Following the ECB’s recent decision to lower interest rates further, the rates on the money market (the Euribor rates) are likely to continue to fall. The ECB is in fact charging negative interest at present on the money that financial institutions place with it. Besides being linked to the ECB interest, the rates on the money and capital markets are also tied to the economic and political situation. The downward trend in interest rates on the money and capital markets is one of the factors causing the rates at banks to fall.
See ABN AMRO’s interest rates at 30 September.
How are interest rates on savings calculated?
Banks have two options for raising the money that they use for their lendings: using their customers’ savings or raising money on the financial markets. Interest rates on savings are influenced by the prices on the financial markets. If price increases render it less attractive for banks to raise money on the financial markets, the savings market becomes a popular source for banks, and competition will mean that interest rates there will increase too. Another factor is the demand for credit and mortgages. As soon as this demand increases, there will also be an increased need for savings, being one of the sources of the money that banks use for lendings. A greater savings requirement at banks generally leads to higher interest rates on those savings as the demand increases. The actual rates for savings also depend on the bank’s costs and its profit margin.
Will the lower ECB interest rate also affect mortgage interest?
The ECB interest rate primarily affects money market interest rates (i.e. for short-term loans), and has less impact on the capital market rates (for long-term loans). As mortgages are long-term products, they are financed using money raised on the capital market. The money market interest rates therefore only have a limited impact on mortgage interest. Besides the financial market interest rates, mortgage interest also comprises other costs and risk mark-ups.