SAVINGS: We hear a lot about the economic and jobs costs to hiking interest rates. But a benefit is the higher interest rate on savings. Especially welcome in regions, like Europe, with aging populations and high savings levels. Cash has been the best performing asset class in recent months. Yet bank savings rates sharply lag inflation and policy interest rates. This could keep pushing savers into higher yielding areas, like bonds and high dividend equities. It also helps banks (XLF), typically slow to pass rate rises to savers. This speed is driven by levels of bank consolidation, competition, and the need to meet loan demand. See @TheBigBanks
RATES: We compare average one-year deposit savings rates versus inflation (see chart). The gap is dramatic despite recent rises in central bank rates. They vary dramatically even across the EU with its single policy rate. From 1.59% in Holland to 0.02% in Spain. The smallest gap to inflation is 5% in Australia. Savers will continue to welcome rate increases, and cash remains popular in these volatile markets. But the inflation lag remains a powerful impetus to look up risk curve, to treasury bonds (BIL, SHY), corporate bonds (VCSH) or high dividend equities (HDV).
EUROPE: ECB raised its deposit rate above zero for the first time in a decade, with yesterday’s 0.75% hike. This will boost the average 0.3% savings deposit rate. In the US the average 1-year savings rate is 0.46%, up from 0.13% at the start of the year. But still well behind the 2.50% Fed policy rate. Typically online banks, like Ally (ALLY) and Capital One (COF), are first movers to hike rates given their low cost structures and lesser ‘captive’ deposits. Those with large branch networks, like JP Morgan (JPM) or Bank of America (BAC), are often slower. Deposit rates are also driven by loan demand. This has been running at 11% in the US but is under 5% in Europe.
All data, figures & charts are valid as of 08/09/2022