Low interest rates

Interest is a fee for lending money. When you borrow money from the bank to buy a house, you pay mortgage interest. And if you borrow money for a large purchase, you pay credit interest. Conversely, banks charge you a fee if you entrust your savings to them. At the moment, the savings interest rate is zero or almost zero and even negative for large amounts.

How high or low interest rates are is determined by the market mechanism – the relationship between supply and demand for loans and savings. If savings are in great supply or if there is little demand for loans, interest rates are low. And if demand for loans increases, interest rate go up. This is not unlike prices for other products. Take, for example, the increased price of cardboard. Demand has increased because our online shopping has increased, and all those purchases are packed in cardboard. At the same time, supply has decreased due to the scarcity of paper.

Development in 10-year interest rate and inflation in the seven largest countries (G7) since 1980

Interest rates have been low for many years. Low interest rates affect us all. A few examples:

• Saving yields nothing or almost nothing due to the low savings rate. For large amounts, interest rates are even negative. But borrowing money is actually cheap.
• Because borrowing money has become so cheap, people can afford higher mortgage loans. This is a factor in the sharp rise in house prices. Similarly, investors are increasingly keen to purchase residential properties, with yields on bonds, for example, having fallen.
• Low interest rates make saving up for retirement more expensive. Due to the low interest rates, the liabilities of the pension funds have increased.
• The government has more budgetary leeway. As the government sees its interest charges go down, it can refinance debt and take out more at low costs.
• Most banks experience higher demand for loans and credit, but over the longer run they may see their interest income dip below the amount in interest they owe on savings accounts.

At the moment, interest rates are low because savings are in great supply worldwide. There are several factors that cause this. Population ageing is a major cause of low interest rates, as elderly people often spend less money, for example on children or their mortgage loan. As the world's population ages, the supply of savings increases globally. Also, the service sector has expanded in recent years and is investing less than the industrial sector. This reduces the demand for loans. In addition, inflation has been very low until recently. This is why the European Central Bank (ECB) has kept interest rates low in recent years. 

The European Central Bank (ECB) sets the key policy rates. This rate eventually works its way into our savings and mortgage interest rates. When deciding on interest rates, the ECB considers the outlook for the economy and inflation. Its objective is price stability – an inflation rate of 2% in the medium term. At present, inflation is much higher. The ECB expects inflation to remain above its target of 2% in the medium term, which is why it is raising interest rates to curb demand and bring down inflation. The ECB raised interest rates by 0.5% in July 2022 and by another 0.75% in September 2022. 

Read more about inflation and about the ECB's interest rate decisions, also known as its monetary policy.