Since the financial crisis of 2008, banking interest rates for customer accounts have followed the steep decline in central banks’ prime lending rates. This is due to the policies followed by the major economies to flood the markets with cash in order to stimulate spending and save a complete melt-down.

 

A comparison of European Central Bank banking interest rates over the two decades illustrates how general instability in the economy affects interest rates, with the ECB making frequent adjustments in the early years of the century – post the overheating which triggered higher rates to keep the lid on – and in response to the 2008 crisis where in just 30 months, rates fell from 3.25% to 0.25%. Throughout 2020, the central bank has kept rates effectively at zero.

Interest rate levels in percentages per annum-1

Online banks can usually offer higher interest rates on deposits and savings accounts than brick-and-mortar banks. They are able to do this because they usually have fewer overhead costs. Online banks also need a way to attract money, so they tend to offer higher yields than banks with branches.

The actual rate of interest will depend on the type of savings account. For example:

    • Fixed deposits are time deposits, leaving the money in the account for a set period. They are available at traditional banks as well as online banks and online banks tend to offer better interest rates.
    • High-yield savings accounts are savings accounts that offer a higher annual percentage yield, compared to regular savings accounts. Online banks often offer high-yield savings accounts to attract savers who want to earn a better interest rate than what is found at brick-and-mortar banks and credit unions. The disadvantages of this type of account are that transferring money between an online savings account and other accounts can take up to a few days to process and may incur charges, and access to the account via ATM for deposits and withdrawals varies, depending on the bank.

 

  • Standard savings accounts usually offer low variable interest but funds can usually be accessed instantly with no penalties for withdrawal, making it extremely flexible.
  • Fixed-rate savings accounts offer high, fixed rates that are guaranteed throughout the entire term – providing one of the best savings account interest rates available. However, they require you to make one large initial deposit for a fixed period. There is often a fee for early withdrawal.
  • Notice accounts require advance notice before money is withdrawn. Usually this is between 30 and 90 days and the bank will normally request the specific amount you intend to withdraw. However, because the bank or building society has this notice period, they are able to offer a higher interest rate.

 

A few examples of the best online banking interest rates in Europe are:

  • ING Direct in Spain offers up to 1.50% for fixed deposits for term of 1 – 12 months with a maximum account balance of 1 million EUR, interest paid annually
  • In Italy, Banca IFIS offers up to 1.09% for 1 – 12 months fixed deposits, IBL Banca offers 1.00%, CheBanca! offers 0.25 – 1.50% all with maximum account balance of 1 million EUR, interest paid annually
  • In Germany, Targobank offers 1%, with a maximum account balance of 40,000 EUR, interest paid annually.
  • Banks in Finland are offering higher rates, up to 3%, but this service is restricted to citizens of the country.
  • For the best European high interest saving account in 2022, it will be necessary to commit the funds for longer periods. For example, the difference between short-term year and 5 year savings account rates in the UK is substantial. A 3 month account will yield just 0.45% next year, while 5 year accounts, with withdrawal limits, will yield more than double that at 0.95%.

 

The best interest rates in Europe over the next several months are unlikely to change substantially from current offerings. As has just happened in the USA, enormous government spending packages in response to the new wave of the COVID-19 virus are going to flood the money markets with cheap cash and keep central bank rates down to zero, so there is little reason to expect that commercial lenders will have to up their own lending rates because of higher borrowing costs.

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