ING has lowered the savings rate from 0,03% to 0,02%. ABN Amro already took that step last month and it is expected that the third bank will follow shortly. After a break, the road to 0% seems to have resumed. The CEO of ING did not rule out that the interest on savings for all customers could become negative in the long term.
Although the actual savings interest rate (the difference between the savings interest rate and inflation) has been negative for a long time, many Dutch people miss this. This is due to the fact that they suffer from 'money illusion'. This is the phenomenon of looking at nominal and not real quantities. The savings balance is a good example of this. Typically, the balance at the beginning of the year is compared with the balance at the end of the year. If it is a little more, that is reassuring (even if purchasing power has decreased).
Every time I calculate in a presentation what the negative 'real savings interest rate' means, I see people get angry. Only then will they see how the savings flag really hangs. Savers would realize this if the savings interest rate became negative. In other words: when no money is added on the interest credit date, but is deducted from the balance. That moment comes now close to.
Cash
With that in mind and looking at the period up to and including 2025, it is interesting to determine how likely it is that inflation will rise in that period and that savings interest rates will keep up with that increase. For example, inflation could rise if all eurozone residents suddenly started spending the cash they have at home. As a result, demand would rise much faster than supply. The very low inflation would then surprise everything and everyone.
The first thing we need to know is how much money is involved in the first place. It turns out that there is about €1.200 billion in cash in the eurozone. The €50 banknote is the most common and accounts for almost half of the amount. The ECB from time to time asks residents in the eurozone whether and how much cash they have. A recent edition shows that 24% have cash at home. This happens least often in France and Belgium (15% and 19% respectively). In our country the percentage is somewhat above average: 29%. Approximately 1 in 3 households has cash on hand.
The majority (78% in the eurozone and 77% in the Netherlands) involve less than €1.000. In addition, 1 in 10 residents reported having more than €1.000 at home and 2% reported having more than €5.000 in cash. About 10% refused to answer the question. In the Netherlands, every fifth respondent refused to answer this question, the highest percentage of all countries. In addition, only about 4% of Dutch people indicated that they had more than €1.000 in cash.
The ECB estimates that around 30% of all cash is in homes, stored as a precaution. Approximately 33% of all banknotes circulate in countries outside the eurozone. On the other hand, it is also expected that this situation has been underestimated, because many people do not want to say whether they have cash at home (and how much). Sometimes they have specified a lower quantity than they actually have at home. This certainly applies to those who keep (very) large amounts of money at home.
In summary, we can say that there is quite a lot of cash under the proverbial mattress at home. This roughly amounts to between €300 billion and €400 billion, all within the eurozone.
Boost inflation
If the Finns, the Dutch, the French and everyone else were to unexpectedly take this money from under their mattresses and then take it to the nearest shopping center, it could very well boost inflation. However, I think the chance that the Europeans will do that (looking at the coming quarters) is very small.
Expecting a sudden wave of consumption requires a consumer who has a positive outlook on the future. Since that consumer has been reading about declining growth (or a recession), I don't see that confidence increasing any time soon. That confidence is currently on the high side, but the fact that consumption growth is still not too bad is also telling. It wouldn't surprise me if consumers slowly become less optimistic. If the economic situation deteriorates further, it would not be surprising if the mood deteriorates. In such times, the consumer usually retreats into his shell and keeps his hand on his purse strings.
Viewed in the longer term, I fear considerably higher inflation, partly because Europeans will spend that cash. However, the old Dutch saying 'after rain comes sunshine' also applies to economics. After every period of low growth (or a recession), comes a period of boom. I see that happening in 2022. High economic growth is usually accompanied by euphoria and rising consumer confidence. It is at that time that I fear that inflation may rise quickly and become higher than what the market currently expects.
Truth
If that becomes true, a rapid repricing of government bonds (a rapid increase in long-term interest rates) would not be surprising. It wouldn't surprise me that all those billions of euros could be spent under the mattresses at that moment. This is because I see the European Central Bank (ECB) raising interest rates slowly and piecemeal. Because the bank has kept interest rates at 0% for a decade, a large part of the economy has become addicted to free money.
This means that if the ECB abruptly ends this free money, it would risk a recession (not to mention possible financial problems for governments). In summary, this means that the savings interest rate (which goes hand in hand with the ECB interest rate) will remain near 0% for a long time. That money under the European mattresses will lose its value very quickly unless it is spent.