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MONEY

Five ways Germany’s soaring inflation could affect your life

The cost of living has been sky-rocketing in Germany over the past few months - and experts believe this trend could be set to continue. But what impact could this have on your everyday life and future plans?

Euro note in shape of house
A euro note shaped into a house. Photo: picture alliance/dpa/pixabay/moerschy | pixabay/moerschy

According to the latest figures released by the Hans Böckler Stiftung, inflation soared to an unbelievable 7.4 percent in Germany in April, outstripping all previous estimates and hitting a high not seen in four decades. The year before, it had been less than half that figure at 3.1 percent, and in 2020, it was a mere 0.5 percent.

So, aside from the fact that everything seems eye-wateringly expensive all of a sudden, what does this high inflation rate really mean for people’s livelihoods, debts and savings? Here are a few things you may notice. 

1. You have less spare cash 

This may seem like an obvious one, but inflation is all about the cost of living – and high inflation essentially means that everyday things are going to get a lot more expensive. To determine how much prices are going up, economists compile a massive hypothetical basket of goods that reflects the everyday goods and services that consumers have to pay for in their day-to-day lives. This could include the cost of transport like train tickets or renting a car, housing costs and bills, food and drink or consumer products like electronics, toiletries or clothes.

The average increase in prices in the basket is used to determine the rate of inflation – in other words, how much more an average person will have to spend to maintain the same standard of living or buy the same things. At the current rate of inflation, someone will generally be paying 7.4 percent more for the same goods and services in April 2022 as in April 2021. That means that a set of items that cost an average of €100 last year will now cost an average of €107.40. (If you want to get a sense of how much things could cost in five years at the current rate of inflation, this depressing calculator will help you do just that). Since you’re unlikely to earn €7.40 more for every €100 you earn, you end up becoming poorer in real terms over time. 

READ ALSO: The products getting more expensive and harder to find in Germany

Of course, inflation can impact people slightly differently depending on what items they buy more and less of. For example, a car driver will have to pay significantly more for fuel in 2022 than in 2021, but for public transport users, the cost of a train ticket has actually gone down slightly (and will go down even more in summer). Relying on fossil fuel energy sources exclusively for heating and electricity would have also made things a lot pricier this year, while people with heat pumps or eco-friendly electricity contracts should be much less affected. 

Despite the lifestyle differences that can impact how much more you’re spending, the bottom line is simple: most people will end up having less disposable income as a result of high inflation, with lower earners taking the hardest hit. 

2. You pay more for housing

As The Local has been reporting, an ever increasing number of tenants are signing up for what’s known as an Indexmiete, or index rent, which essentially means that rents rise each year in line with inflation. With the current soaring inflation rates, this means that a certain group of renters could see significant increases in their rent.

Others may notice their rental costs rising for a different reason once they get their annual utilities bill and are asked to pay any additional money they owe to the landlord. Since energy costs have risen at such an alarming rate this year, it’s likely that most estimates of bills based on last year’s prices will fall well short of what’s actually owed, which could lead to nasty shocks and a big adjustment of the ‘warm rent’ (rent and additional costs) for next year. 

READ ALSO: EXPLAINED: Why tenants in Germany could see bigger rent increases this year

“Anyone who does not increase their advance payment for ancillary costs will face high additional charges next year,” Rolf Buch, CEO of letting agent Vonovia, said in a recent interview with Focus. “For some tenants, this could amount to up to two months’ rent.”

Of course, home owners aren’t exempt from hefty bills – but they do get some consolation. High inflation has been linked to an increase in property places, partly because prices are rising in general and party because buying property is a way to avoid the value of savings getting eroded – which brings us to our next point…

3. Your savings aren’t worth as much

Germany is a nation of savers – and placing cash in a bank account is by far their favourite way to do it. At the end of 2020, Germans held a whopping €2.8 trillion in bank accounts, with much of the money they saved in lockdown year being stashed away at their bank. 

This may sound great on paper, but unfortunately, high inflation and rock-bottom interest rates tend to mean that the money in these accounts is actually losing value the longer it sits there. Think of it like putting a five euro note under your pillow for ten years. If nobody adds to that five euros, you’re not going to be able to buy as much with it when you take it out compared to when you put it under there. 

Woman withdraws cash

A woman withdraws cash from her bank account. Photo: picture alliance/dpa/dpa-Zentralbild | Fernando Gutierrez-Juarez

Essentially, inflation rates at 7.4 percent, you’d have to find a savings account that could give you at least 7.5 percent interest to stop you losing money. Sadly, interest rates are actually hovering below one percent on most ordinary savings accounts or bank accounts these days.

Unsurprisingly, this can make it increasingly hard to people to save for their old age and retirement – though it’s always an option to put your money in investments rather than savings accounts to try and get a better return. 

READ ALSO: How to protect your savings against inflation in Germany

4. … and nor are your debts 

On the flip side of seeing savings get eroded, people with debts will essentially see the amount they owe go down as well – especially if the interest rate they’re paying on their loan or mortgage is less than the rate inflation. 

Essentially, as buying power gets eroded, the debt is worth less over time – which is why even after 25 years of paying interest on a mortgage, you may only really be paying the equivalent of what you borrowed to start with, or even a bit less. 

It’s this that has made getting on the property ladder such an attractive prospect for people in Germany in recent months, since interest rates are low and inflation is high. However, this trend has sparked a wave of borrowing which some worry could became unsustainable if interest rates were to rise even a little bit. If this happens, Germany’s booming property market could prove to be a bubble. 

READ ALSO: German central bank could intervene over rising house prices

5. Travelling gets more expensive

If you have savings in another country or need to convert money to travel abroad, you have noticed that inflation isn’t good for exchange rates. In fact, inflation tends to devalue a currency by reducing its purchasing power over time. Of course, the high interest rates in Germany wouldn’t be solely responsible for this – you’ll need to look at the figure for the Eurozone as a whole.

Various foreign currencies lie on a table

Various foreign currencies lie on a table. Photo: picture alliance/dpa | Sven Hoppe

Currently, the euro has sunk to a low against the British pound not seen since July 2016, and it continues to fall in value against the dollar. 

Of course, this is great news if you’re earning money in another currency that’s strong at the moment or if you have savings in that currency that you want to conver into euros. On the flip side, it’s not great news for travelling abroad or trying to converting euros into another currency. 

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MONEY

Why German bank customers could soon pay less for their account

A major German bank is set to scrap fees on large balances - and a number of others look set to follow. Here's why people in Germany may be paying less for their savings or current account in the near future.

Why German bank customers could soon pay less for their account

What’s going on? 

Interest rates have been at rock-bottom levels for years, making it much harder for people to get returns on their savings.

In recent years, many banks have even been levying what’s known as negative interest rates on customers. If interest normally incentivises people to save by helping them to grow their money, negative interest basically does the opposite.

If you have a certain amount of money in the bank, your bank will charge you negative interest via a deposit holding fee, which will usually be a certain percentage of your balance.

With N26, for example, balances of over €50,000 are subject to a 0.5 percent fee each year. For a balance of exactly €50,000, that equates to €250 in bank charges just for keeping your money there. 

Some banks even charge a deposit holding fee for balances as low as €5,000 or €10,000 in a current account. 

On Tuesday, ING Deutschland became the first bank to announce that it would be scrapping negative interest rates for the vast majority of its customers.

From July 1st, new customers of ING will be able to deposit up to €500,000 in their account without being charged for it, while existing customers will automatically have the fee-free amount raised to €500,000 from the current €50,000. 

Now, it seems a number of other German banks are planning similar moves. 

Why is ING Deutschland ending the holding fee?

Not entirely out of the goodness of its own heart – though that doesn’t stop it being good news for customers.

The European Central Bank (ECB) is set to make a decision on interest rates in the bloc this July, and most people expect that the bank is poised to increase interest rates from minus 0.5 percent to zero. 

Since banks have basically been passing on the ECB’s fees to their own customers, a hike in the ECB’s interest rate would spell the end of most negative interest-rate accounts in any case. But ING Deutschland said it wanted to pass on the positive interest rate trend to its customers even earlier.

READ ALSO: EXPLAINED: How to save money on your taxes in Germany

“With the increase in the fee-free allowance for credit balances on the current and extra accounts, the deposit fee is no longer applicable for 99.9 percent of our customers,” said Nick Jue, chief executive officer of ING in Germany. “We were one of the last banks to introduce a deposit holding fee and one of the first to virtually abolish it.”

He added that the bank had already kept its promise to abolish the holding fee for almost all customers before the European Central Bank made its decision.

Does this have anything to do with that court decision on bank charges?

That’s definitely a factor. According to a decision in Germany’s Federal Supreme Court last year, credit institutions have to obtain the consent of their customers when making changes to their fees and conditions.

That means that financial institutions have to ask for consent to current fees retrospectively if they don’t want hoards of people trying to claim their money back.

If a customer doesn’t consent to the fees, the bank will usually close that customer’s account.

Man signs a contract

A man in a suit fills in an official form. Photo: picture alliance/dpa/Pixabay | hnw-Gruppe

According to ING Deutschland, the scrapping of negative interest rates on balances up to €500,000 may help to sway those customers who have not yet agreed to the latest terms and conditions – including the deposit holding fee.

Anyone who agrees to the Ts&Cs will automatically be given the higher allowance as of July 1st.

“ING Deutschland expects that the increase in the allowances will convince in particular those customers who have not yet agreed to the General Terms and Conditions including the holding fee, and that the bank will thus terminate fewer customers than last planned,” ING said in a press release. 

READ ALSO:

What other banks are planning to do this?

According to reports in Bild and Bialo, the other banks planning on ending negative interest rates (or raising the threshold for fee-free balances like ING Deutschland has done) include:

  • Deutsche Bank
  • Commerzbank
  • Deutsche Apotheker- und Ärztebank (Apobank)
  • Dortmunder Volksbank
  • Hamburger Sparkasse (Haspa
  • Frankfurter Sparkasse
  • Frankfurter Volksbank
  • Mittelbrandenburgische Sparkasse
  • Nassauische Sparkasse (Naspa)
  • Ostsächsische Sparkasse Dresden
  • Sparda-Bank München
  • Sparda-Bank Südwest
  • Sparda-Bank West
  • Sparkasse Hannover
  • Sparkasse Pforzheim Calw
  • Volksbank Stuttgart

What does this mean for my savings?

There’s good news and bad news.

The good news is that, from July, you’ll no longer have to pay exorbitant charges just to store your money in a safe place – and you won’t be penalised for saving more. The bad news, on the other hand, is that low interest rates aren’t going away anytime soon.

So while you won’t be losing money hand over fist, you won’t be earning much of a return on your savings either.

Banks in Frankfurt

Skyscrapers in the financial district of Frankfurt am Main. Photo: picture alliance/dpa/dpa-Zentralbild | Fernando Gutierrez-Juarez

“If the interest rate environment continues to develop positively, we will also let our customers participate in this development,” said ING Deutschland’s Nick Jue. “However, the low-interest phase will continue for the time being and broadly diversified investments will remain important.”

Getting a securities account where your money is invested is one way to try and grow your savings, as is investing in property.

Of course, people with mortgages and other loans benefit from the low interest rates – which could be why the German property market is currently booming. 

READ ALSO: Five ways Germany’s soaring inflation could affect your life

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