The low policy rate environment affects both the return of savers on their assets as well as the interest rate borrowers pay on their liabilities less than commonly thought. Households’ average return, even for low income households, is not significantly different in the low policy rate environment as it has been in more “normal” times. Considering that inflation rates were also lower in the low policy rate environment, real returns to most households were higher than in 2003 to 2007, largely due to the appreciation of real estate prices. At the same time, while households that borrow benefit from low policy rates, they do not benefit by as much as previously thought due to the fact that banks are slow to pass on low policy rates to their customers. On a net basis, the average household in Germany, despite being a net saver, benefited from the low policy rate environment. Of course for each individual household, this depends crucially on the composition of her portfolio. Households with a balanced portfolio including real estate and equity fared better than those with all of their savings in savings accounts. This result simply re-iterates what many observers have emphasized for a long time: The low share of homeownership and the low participation rate in the stock market hurts the return German households are able to obtain on their savings. Aggregating these higher returns and lower interest costs across households, households benefited from the low policy rate environment by 364 billion Euro in real terms, i.e. adjusted for inflation. There are, however, significant redistributive effects. Low income renters do not benefit, but lose under the low policy rate regime, although by individually small amounts. High income homeowners benefit disproportionally, because they benefit from lower interest on mortgages and from the appreciation of real estate values.

Low income renters do not benefit, but lose under the low policy rate regime, although by individually small amounts.

We concede that the gains on equity and real estate are unrealized gains and therefore have a somewhat different quality than interest income from a savings account. Hence, ideally one would need to calculate risk adjusted returns, but this is beyond the scope of this note. What are the theoretical underpinnings of this result? The costs and benefits in terms of deposit rates and borrowing cost to consumers coming from a central bank’s policy rate depend on the speed of and extent to which these policy rates are passed through to retail rates. The literature shows that this speed is a function of the competition between financial institutions, and the competition between financial institutions and financial markets. In the absence of such competition, policy rates have an effect on retail rates that is asymmetric in two dimensions: One, it is asymmetric in the sense that high policy rates are only partially reflected in deposit rates. This is the reason for the surprisingly small effect of the low policy rate environment on deposit rates: Deposit rates even in the high policy rate environment were quite low and, hence, in absolute terms had little room to decline when policy rates  declined, even though banks reacted quickly to the low policy rate environment. Second, borrowing rates fully reflected the high policy rate environment, but with the exception of mortgages did not decline by the full change in policy rates. This is especially true for rates on overdrafts of checking accounts.