Why 2023 will be a better year to grow your savings in Germany

What's going on?

Savers in Germany can finally celebrate a bit of good news: since the middle of the year, interest rates have been on the rise. According to price comparison site Verifox, banks are currently racing to make their savings and current accounts more attractive as they compete for customers in the new year. 

"At the moment, we are seeing intense competition for investors' savings, especially among the top providers," explains Oliver Maier from Verifox. 

As a consequence, the comparison portal is now seeing German banks offering higher rates than they have in years. 

The background for this is the wider economic environment. With inflation hitting a record 10 percent in the Eurozone this year, economists at the European Central Bank (ECB) have responded by driving up interest rates. 

Though the ECB didn't spring into action until July last year, since summer there's been a seemingly endless series of rate hikes. In fact, the ECB's key interest rate was raised four times this year - from 0.0 percent to 2.5 percent - and was raised yet again in February this year to 3 percent.

It is now at the highest level it's been in over a decade.

That in turn has meant German banks have been able to raise their own interest rates for customers. However, interest rates are still much lower than inflation, which can ebb away at savings in the long run. 

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

What does this mean for me?

That depends on whether you're more of a saver or a borrower. 

For savers, it means that you can finally start to get some returns on your savings each year - provided you find a bank offering competitive rates. 

According to Verifox's analysis, savings accounts with a fixed term of two years were bringing an average of 2.09 percent interest in December last year, compared to just 0.82 percent in August. 

That means someone with savings of €20,000 per year would now see their savings go up by around €836 by the end of the fixed term, compared to just €328 based on the August rate.  

For one-year fixed accounts, average rates rose from 0.54 to 1.73 percent over the same period. And after years of zero and negative interest rates, money in current accounts now earns an average of 0.45 percent interest. 

Isn't this bad news for borrowers? 

Unfortunately, yes. High interest rates on savings also mean high interest rates on loans, so you can expect to pay more on any credit you take out next year. 

According to data from the comparison portal Check24, for example, a loan of €10,000 paid back over 60 months would have cost €187 a month if it were taken out in January. For a loan with the same amount and term taken out in December, you'd now be paying €196 per month. That may not sound like much, but it all adds up to a €540 difference on your total repayment.

A similar trend is happening for people with an arranged overdraft on their bank account. "Credit institutions are currently increasing their overdraft rates sharply and rapidly," says Heike Nicodemos from Finanztest magazine. "This dynamic has been strengthening since May."

According to an analysis of 171 credit institutions by consumer organisation Stiftung Warentest, banks are currently charging an average of 9.94 percent interest on overdrafts. In May, when the investigation began, this figure was 9.25 percent.

READ ALSO: German banks hike interest rates on overdrafts

Will interest rates continue to rise? 

It's not always easy to predict these things, but the signs at the moment suggest that interest rates will continue to go up next year. 

In late November, one of the ECB's governing council members signalled that further increases were on the horizon, but said they would likely be smaller than the hikes seen in 2022.

"When we get into next year, the likelihood is that if the rates go up, they'll go up by smaller increments," Gabriel Makhlouf told Ireland's Sunday Independent newspaper in an interview.

Price comparison portal Verifox also doesn't see the trend slowing down any time soon and believes savers will see even higher interest rates offered by banks next year. 

 "Currently, a new bank is moving to the top of our interest rate comparisons every few days, and the end of the line has not yet been reached," says Oliver Maier.

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Where should I put my money - and when?

This is the key question for savers, and the short answer is that it pays to shop around.

While average interest rates have risen significantly, there's still a lot of variation between different banks and account types. For example, regional banks are still offering much lower interest than national ones: at these local banks, customers are getting just 1.21 percent interest on a fixed two-year savings account, compared to 2.09 percent at the national banks.

In fact, the most competitive providers in Germany are offering as much as 3.10 percent interest per year on two-year fixed-term accounts. And these providers may not be the big-name brands, but could well be smaller banks and fintech startups who are trying to stay competitive. 

That said, savers should exercise a little bit of caution when it comes to fixed-term accounts.

Although having a fixed rate is great on a mortgage at a time when interest rates are rising, having your savings locked up in one account for a number of years could mean you miss out on better offers when they come along.

"If interest rates continue to rise, it would of course be a shame if one's money is stuck in lower-interest investments for several more years," says Maier. "But simply leaving the savings lying around while you keep waiting for the best investment time is no solution either."

One option, according to Verifox, is to open two fixed-term accounts that alternate year on year, such as a12-month account and a 24-month one. This means you can be slightly more flexible and move your money around if better offers come along.

READ ALSO: The complete guide to opening a bank account in Germany

People with some money in the bank should also look out for attractive introductory offers. Banks are currently trying to hook in new customers by offering high interest rates on current accounts for a certain number of months. After this, the standard rate applies. 

These promotional offers can see customers netting up to 2.1 percent interest on their current account, which is almost double the maximum standard interest rates offered by German banks. 

Taking this route could be especially beneficial for someone who doesn't mind moving their money around after the promotion has ended. For example, it could be used as a bridging measure until you find a good fixed-rate offer or before switching to another promotional offer.