How to use rising interest rates for your finances

Have you received a call from the bank yet? Recently it went away; I thought it was just another annoying call center health insurance premium. The surprise was great: the bank was on the other end of the line. I don’t know how you feel, but over the past 10 years my bank has called me a total of 3 times when my credit card was misused in the online jungle (super handy!) or when there was something for sale. This time the surprise is that there will be a new campaign for savings accounts and term deposits that should earn more interest.

Interest rates are rising, with all the pros and cons that entails, and the question remains for how long. Here you will find some background information and tips on how you can use the interest rate cover for your money.

In simple terms the theory says: When interest rates are low, as they have been in recent years, this should encourage people to consume more. This increases the demand for goods and services, and with more demand, prices also rise, which can lead to inflation. Then the central bank increases interest rates, saving becomes more attractive, people spend less money, demand falls and prices fall.

This mechanism is currently not working well due to prices not increase due to increased demand (demand-induced inflation), but because energy and other raw materials and goods are scarce and therefore more expensive (supply-induced inflation).

In the middle of last year, due to the consequences of the pandemic and the war of aggression in Ukraine, there was a shortage of energy and supply bottlenecks, as a result of which prices for oil and gas, for example, rose and inflation began to rise, for example up to 10% in the eurozone. Central banks responded and interest rates changed. Since then, central banks have gradually increased the so-called policy rate every few months. The total increase by the European Central Bank as of August 2022 is 4.25%, in Switzerland the Swiss National Bank increased the policy rate to 1.75% mid-year – within a year the policy rate has skyrocketed from -0.75 % at a historically fast pace.

The policy interest rate is set by the central banks and is, as it were, the highest interest rate on loans.
There are a number of sentences:

If the policy rate rises, it becomes more expensive for banks to obtain new money from the central bank. They do it less, the money supply decreases and the existing francs are worth more. Borrowing money is becoming increasingly expensive, for example for companies or for mortgages. Consumers consume less because it is more attractive to save or they can no longer consume due to the already higher prices. Demand is falling and so are prices.

It becomes problematic if inflation persists for longer and a wage-price spiral arises: The workers demand more wages because of the higher prices, the companies pass on the higher wages in the prices of goods and services and this fuels the entire price increase. It also becomes problematic when slow consumer spending causes an economy to grow very slowly or not at all and enter a recession.as is currently the case in Germany.

For all of us, rising interest rates mainly mean:

The question remains how long interest rates will rise or remain at current levels. The experts do not agree with this, because the current situation also shows very atypical features, such as a booming labor market and a recession in some sectors, such as manufacturing, while other sectors, such as services, are flourishing. It is currently assumed that interest rates will fall again in the long term, but that may take some time.

Today’s higher interest rates have several effects on your finances:

You now receive more interest on your savings account and different banks apply different special conditions. Check carefully to what conditions the higher interest rate is really linked: in some cases you have to buy additional products as a package, you can only withdraw your money in annual installments, etc. Moreover, the rates are still quite low. You can make a comparison here.

Now you have the chance, yours Making money available for a fixed period, for example 6 or 12 months, at a fixed interest rate with a so-called term deposit from the bank. This option can be particularly attractive for money that you wouldn’t invest in the long term, such as part of your emergency fund, or that you don’t need immediately in the near future, because you can put the money to work and know it will work. will be available again in 6 or 12 months.

Capital market interest rates are also rising Bonds more attractive again. There are very different types of these, such as convertible bonds, corporate bonds, government bonds, etc. An interesting option can be, for example, bond funds or bond ETFs, where you can invest not in one, but in a whole basket of bonds, ideas and ideas. for example here.

Prices for private loans have increased since 2022. In January 2023, according to Moneyland, the average of all published minimum interest rates for all newly concluded private loans was 5.17%. However, there is also There are major differences between providers and the calculated interest rate is calculated based on various factors, including the term and creditworthiness – a loan comparison is definitely worthwhile.

If you want to buy a house now or your mortgage needs to be renewed, then you have to Take into account the associated duration and costs. Short term mortgages are the current interest rate environment more exposedWhether you want to enter into a long-term commitment for several years now that interest rates are rising largely depends what interest rates you expect in the future. More background information and an analysis can be found here.

There are also changes in the field of taxes. As SRF recently reported, you will pay from October High payment interest that can reach 8% if you pay your taxes late. At the same time it remains compensation interest, which you received for paying taxes in advance, is 0% in 10 cantons and according to the report there are no plans to adjust this for next year in, for example, Glarus, Wallis, Freiburg and Neuchâtel. So avoid tax debts if possible and if you want to pay in advance, first check what interest your canton pays, it may be less than if you put the money in the bank as a term deposit for 6 months or get a savings account.

We will all only discover gradually whether interest rates are here to stay, but it will be worth it. to regularly monitor interest rate developments and, because providers react very differently, to regularly make comparisons in order to take advantage of one or two opportunities. How are you doing? Have you made any changes to your savings accounts or investments? What experiences and tips do you have?💰