Lesson 2 of 2 · 6 min read
Where interest comes from
The rate on your account isn't something your bank invents. It comes from higher up.
The central bank sets the tone
The European Central Bank decides at what rate banks can park and borrow money with it. Every other rate hangs off that. If the ECB raises rates to slow inflation, borrowing gets more expensive and saving more attractive, and the economy cools. Lower them and the reverse happens. It's a blunt dial with a delay: a hike only works through after months.
Why your bank lags
When market rates rise, banks usually raise their mortgage rate immediately and your savings rate much later. That gap is profit for the bank, and it can cost you hundreds of euros a year. Savings rates also differ sharply between banks. Comparing takes ten minutes and often earns more than any investment, because it's risk-free.
Stocky says
Check your savings rate once a year. Well below what others pay means you're paying for convenience.
What rates do to investing
High rates make safe money attractive, so money flows out of shares and especially out of companies whose profit sits far in the future. Low rates do the opposite. That's why markets move on one sentence from a central bank. You don't have to predict it. You do need to know it exists, so a fall after a rate decision doesn't surprise you.
Remember this
- The central bank sets the base rate and everything hangs off it.
- Banks raise your savings rate more slowly than your borrowing rate. Compare.
- High rates weigh on shares, especially those with profit far in the future.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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