One person’s suffering is Freud’s: If savers are annoyed about mini-interest on overnight and fixed-term deposits, borrowers will be happy about cheap loan interest. In 2019, it even went slightly down again. What development can be foreseen for 2020?
MCB base rate
The key interest rate of the MCB determines the percentage by which banks can borrow money from the headquarters in Frankfurt. The following applies here: the lower this value, the lower the loan interest. Finally, the financial institutions pass on their costs to the borrowers in the form of MCB interest.
The key interest rate has been at zero percent for some time. Banks that store their money with the MCB and do not spend it as loans even have to pay a penalty interest. For this reason, for example, the average interest rate on loans with a ten-year term fell from just under 1.9 percent in January 2019 to around 1.49 percent in January 2020. The MCB has announced that it will not change any of the current rates by mid-2020 – probably even more out. The key interest rate is therefore unlikely to change interest rates this year.
Creditworthiness of the borrowers
The specific interest rate for a loan almost always depends largely on the creditworthiness of the borrower. The technical term is to be understood as the “credit repayment ability” of a person. The better this is, the lower the interest rate – after all, the risk for the bank is lower. The creditworthiness of Germans improved overall in 2019. The situation on the labor market was still positive. Private debt has not only been stable for years, it has even decreased slightly. Salaries rose slightly. Lending rates therefore fell slightly despite the stable base rate in 2019.
A further increase in German creditworthiness is expected for 2020. Adjusted for inflation, real wages are expected to rise by 1.3 to 1.5 percent. By contrast, debt continues to fall. Lending rates could therefore continue to fall.
Competition for banks and borrowers
Banks and borrowers struggle with competitors when it comes to loans. For example, the so-called “peer-to-peer” loans (P2P loans) have been on the upswing for several years. This is where private individuals grant the loans. They usually have lax rules than the banks. The money houses have to counter with lower interest rates.
The borrowers in turn compete with other investment opportunities for the banks such as government bonds or other forms of loan such as real estate financing. The more lucrative these alternatives are, the higher the interest rates will rise.
The good news for borrowers: their competition was not particularly profitable in 2019 and should not be in 2020 either. In return, more and more players are flocking to the credit market as lenders, because in contrast to the classic investment market, returns can still be achieved here. The strong competition is likely to cause falling interest rates again this year.
Loan rates are a corrective for macroeconomic developments. In boom times, they are relatively high to counter excessive debt. In bad times, they fall to stimulate consumption and promote the economy. In most models, however, economics assumes that weak times usually go hand in hand with high levels of debt. Interest rates should never be extremely low because they retain their corrective function.
We live in an exceptional situation in this regard : The overall economic situation is rather weak for 2020, but at the same time the debt is low. This applies equally to both private and public budgets. Loan interest rates are therefore given a double incentive not only to remain low, but perhaps to fall even further.
Uncertainties in the forecast
The economic development is shaped by the impressions of Nice bank and the trade conflicts between the USA and China and Europe. Any changes here could affect lending rates. The real estate market is also very hot. When the last bubble burst in 2008, it led to a global banking crisis. There are therefore risks here too.
All in all, if none of the uncertainties come into play, lending rates are likely to remain very low throughout 2020. Maybe they will fall even further. This is more likely than an increase. Anyone who currently wants to take out a loan will therefore still find a grateful offer.