Rising Interest Rates in the Euro Zone: Opportunities and Risks for Investors

Investors and savers have been enjoying a positive turn thanks to recent interest rate hikes in the euro zone, which have led to significant shifts in capital market and savings rates. The yield on ten-year German government bonds has reached above 3 percent for the first time since 2011, as a result of the European Central Bank’s decision to raise interest rates by 4.5 percentage points since July 2022.

However, the rise in interest rates does not fully offset inflation, which is something investors should be aware of. Despite some banks offering high-interest rates on call money accounts, inflation in Germany remains high, leading to negative real interest rates. This means that while higher interest rates may offer attractive returns, there is always a level of risk involved.

The rise in interest rates has had repercussions in other financial markets as well, with stock indices falling and the price of gold decreasing. It is important for investors to understand that returns and risks are interconnected in financial markets and that they should be cautious when making investment decisions. While deposit protection schemes provide some level of security for depositors, it is essential for investors to be aware of potential risks and to diversify their investments accordingly.

Economists predict that rising interest rates in the US will also impact interest rates in Europe to some extent. However, many factors influence interest rates aside from central bank decisions, including inflation expectations, economic development, creditworthiness, and risk environment. Inflation expectations are particularly important as they can affect investor confidence and lead to fluctuations in currency exchange rates.

Size is not a guarantee of stability as seen in past financial crises where even large banks required state intervention. In the worst-case scenario, deposit protection of up to 100,000 euros per bank and customer applies in Germany and the EU. This means that deposits are protected in the event of insolvency but customers may face delays in accessing their funds