Article / 12 January 2016 at 13:00 GMT

This is what you really get for your money

  • Nominal interest rates are low and no significant increase is on the horizon
  • When it comes to real yields, looking at inflation is important as well
  • A study by the German central bank investigates real rates over time
  • In the last decades, real rates have been negative before
  • Rates have never to such a great extent been as persistently low as now

Okay, this money looks real, but where is the yield? Photo: iStock

By Clemens Bomsdorf

Despite the recent US rate hike interest rates remain extremely low and are partly negative (though money is no longer free). Saving does not make sense – this is the impression one might get when looking at the current yields of fixed income and deposits.

Well, it should be up to the individual to decide when saving (for example in the form of bank deposits or fixed income products such as bonds) makes sense and when it doesn't, but it is important to remember that it's not the nominal rate that is pivotal, but the real one. 

It's the net effect that counts

It is the latter that is decisive when it comes to what money saved plus accumulated interest is worth in the future. Hence, inflation has to be taken into account, too. And historically as well as nowadays low interest rates go hand in hand with low inflation while high interest rates are offered in times of high inflation. 
Inflating things a bit sometimes helps. Photo: iStock

Experienced investors and trader are (surely/hopefully) aware of the effect of inflation. However, taking a closer look at a recent study by Deutsche Bundesbank, the German central bank (which now is also available in English), reveals some surprises and gives food for thought – not least for those keeping a considerable share of their assets on deposit in banks.

The study shows that the real yield of cash and bank deposits years ago when nominal rates were high sometimes was not even higher than today. That sounds astonishing, but is based on facts.

Real returns on various types of financial asset held by households in Germany (ignore Footnote 1 for now)
Real returns on various types of financial asset held by households in Germany (ignore Footnote 1 for now)
Deutsche Bundesbank says “households’ real total return has also been low at other times in the past, sometimes even far lower than in recent years”.  

The study is titled “German households’ saving and investment behaviour in light of the low-interest- rate environment” and investigates exactly that. Though Germany is in focus, its findings are widely valid as we are currently living in a low-interest-rate environment in the whole Eurozone, the US, Switzerland and many other countries. The historical findings are comparable too. 

Real rates have been negative before – but not for that long 

When it comes to investment preferences of individuals the differences between Germany and other countries are presumably bigger. After all, it is often said that Germans not only have a relatively high savings rate, but are also more risk averse than other country’s savers (we'll take a closer look at this in a later article).  

However, in this article I only want to take a look at nominal rates and real rates and how they (and inflation) developed over time while later other investment classes will be investigated as well as investment behaviour (and how this is influenced by the return).

In summary one can say that the real return on bank deposits saw comparatively little fluctuation over the last 24 years (period under review is 1991-2014):

“From the 1990s onwards, it was usually less than 1% and even dipped into negative territory on occasion, though never to such a great extent or as persistently as in the current setting of low nominal interest rates. There was once a spell in the early 1990s, for instance, when high nominal interest rates coincided with the comparatively high inflation rates caused by the reunification boom, meaning that the real return was low overall. However, towards the end of this boom phase and with  inflation starting to recede in 1994, real returns began to climb again. A similar pattern was also in evidence in the late 1990s before the New Economy bubble burst and also in the years running up to the global financial and economic crisis. But since the end of 2010, real returns on bank deposits (particularly transferable deposits) have been negative, essentially eroding the purchasing power of the assets held as deposits. The dwindling rate of inflation since 2012 sent the return on deposits slightly higher again to a level close to 0% at the end of 2014.” 

Ok, now we know more about real rates and how those developed over time (in particular for bank deposits), next is learning about how that influenced investment behaviour and why stocks should be an essential element of your portfolio. 

Bundesbank building
 The German Central Bank has a lot to say about real interest rates, but at least its
official pictures suggest nobody comes to work in their HQ. Photo: Bundebank

Click here to read "Don't know much about finance", the first article in this series.

– Edited by Clare MacCarthy

Clemens Bomsdorf is a journalist and consulting editor at


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