The average interest rate stands at 0.27%, a small figure but a significant increase from the 0.05% of a year ago. This scenario arises amidst the rising cost of money just after summer. The market anticipates interest rates will reach 3%.
Authors: Francisco S. Jiménez and Ana Míguez
Source: El Economista
Deposits are still a far cry from their former appeal, but the banking sector is starting to offer better returns on these savings. According to the latest statistics from the Bank of Spain for September, families have managed to earn an average yield of 0.27%. While this rate may seem minimal, it represents a substantial increase compared to the 0.05% of a year ago. The last time rates were similar was March 2016.
Extending the term to over two years, banks are offering returns close to 1% (0.98%) on deposits. While this percentage is still small, it is 24.5 times higher than the meager 0.04% from September of the previous year. The last comparable rate was seen in August 2014 at 0.83%.
What’s Happening in the Market?
The banking sector is beginning to revive its deposit collection efforts in response to the rally in interest rates, doing so right after summer, following a decade when such rates were effectively dead due to negative interest rates.
The first reason is straightforward and fundamental for banks. The traditional business of lending and attracting money with negative rates was unfeasible. With current rates on the rise, the financing rate is now 2%—the rate the ECB charges banks for borrowing—and the deposit rate is 1.5%, which is the rate banks receive when they leave their liquidity in the ECB’s coffers. Commercial banks can now resume their traditional practice of offering higher returns on deposits to later lend at a higher interest rate.
Moreover, the outlook for banks remains very favorable. The market anticipates that interest rates will reach 3% by the summer of 2023, giving banks room to continue raising mortgage and deposit rates.
The Free-For-All Is Coming to an End
On the other hand, the ECB has not only tightened interest rates but also reduced banks’ funding options through TLTROs (Targeted Long-Term Refinancing Operations), which previously allowed banks to generate profitability by depositing the amount requested through these liquidity auctions.
Until now, banks had ample liquidity without needing to rely on traditional deposit collection. Additionally, after summer, the sector typically embarks on a commercial offensive to attract new clients. Deposits and interest-bearing accounts often serve as an ideal hook to expand their customer base.
These new offerings are already visible in bank windows, not just from smaller institutions. After summer, Sabadell and Bankinter announced rates of 2%. ING has recently joined in, launching two new ‘Naranja Deposits’ with fixed terms: one for 12 months at 0.60% APR and another for 18 months at 0.85% APR.
Less Pressure on Companies
The scenario has also drastically changed for corporate liquidity. Banks began penalizing company deposits from January 2019. While negative rates were not fully passed on, reaching up to -0.5%, a rate of -0.31% was applied to deposits of up to a year during the pandemic.
With the ECB’s exit from negative rates in June, banks stopped penalizing corporate liquidity and began offering very modest returns. However, in September, statistics from the Bank of Spain show a significant increase. On average, corporate deposits now earn an interest rate of 0.63%, up from 0.12% in August. Rates can even reach 2.3% for terms between one and two years, levels last seen in 2012.
