The banking landscape has been undergoing intriguing changes, spurred by interest rates and the consequent banking habits of households.
This behavioral change stems from the fact that Luxembourg banks are markedly increasing interest rates on deposits with agreed maturities. This is in line with the European Central Bank’s steady beginning in July 2022.
This spike in interest rates has led to a ripple effect on Luxembourg households’ banking preferences.
Increasingly, more funds are being directed towards fixed deposits, culminating in a sum of €4bn by June 2023. Data from both the ECB and Luxembourg’s central bank affirm that this is the most significant accumulation of such deposits in the last decade.
The magnitude of this growth is even more remarkable when analysed year on year.
By June 2022, deposits with an agreed maturity were at €101m. Fast forward to June 2023, and this figure has skyrocketed to €40bn--a remarkable 40-fold increase. This meteoric rise is largely a reflection of the accumulated disposable income in deposit accounts, an outcome of the now alluring interest rates on these deposits.
The trajectory, though predominantly upward, witnessed a slight contraction in April, with net deposits experiencing a dip. This setback was, however, short-lived as May and June registered a robust resurgence.
Two likely reasons for this revival can be identified: an overall uptick in savings and households’ choice to delay significant non-essential expenditures.
Further supporting this hypothesis is the observation that over 97% of total deposits are held with an initial maturity of up to 1 year, suggesting potential future surges in large-volume consumption once the inflation subsides and loan rates stabilise.
Examining the interest rates more closely, it’s evident that they have been progressively advancing. For instance, deposits with a maturity of up to one year were pegged at 2.76% by June 2023.
This rate is closely paralleled by interest rates on consumption loans (2.83%) and house purchase loans (2.70%).
Together, this presents a compelling narrative that certain households, confronted by escalating loan interest rates, are possibly recalibrating their financial approach. Rather than committing to large expenditures, they seem to be more inclined to capitalise on interest earnings from their disposable savings--at least for the time being.