Life insurance, Livret A, credit: the consequences of the ECB announcements

This is the first time since 2011. The European Central Bank (ECB) raised interest rates on Thursday 21 July. They increase by 50 basis points (0.50%), when a limited increase of 25 points was initially foreseen. The institute therefore intends to combat galloping inflation in the eurozone, in a complex macroeconomic and geopolitical context, between the war in Ukraine and the risks for Europe’s gas supply.

This new monetary deal will have consequences for the French economy and families. “Savers rarely win in times of inflation,” said Philippe Crevel, economist and director of Cercle de l’Epargne. “It is affected by rising prices and negative real returns on investments such as the euro fund of life insurance.”

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Most profitable euro life insurance funds

Euro life insurance funds, in which the invested capital is guaranteed, should therefore benefit from rising interest rates and become progressively more profitable. “There is, however, an inertia effect, linked to the fact that insurers have a stock of bonds that roll over as they go along,” notes Philippe Crevel. In other words, the yield on euro funds is expected to rise less rapidly than bond market interest rates.

It should be remembered that the euro funds of life insurance contracts are invested in sovereign bonds (loans issued by governments) or corporate bonds (debt securities issued by companies).

Savers who invest their money in bonds, via a euro fund or a securities account, will therefore be able to benefit from higher coupons, i.e. higher interest rates. “Conversely, a rate hike can have a negative effect on the bond’s face value. It is necessary to reach the end of the obligation to obtain full repayment. If you resell it earlier, you may end up with a bond that has lost half of its value, ”warns Philippe Crevel.

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A stronger euro, favorable to investors on the American markets

The ECB rate hike should favor a stronger euro versus the dollar. The European currency has lost much of its value since the beginning of the year, weighed down in particular by the war in Ukraine, while the greenback has served as a safe haven. The euro even fell below par with the dollar in mid-July. In the wake of the Central Bank announcement, it was stronger against the US currency. However, it is likely to remain relatively low in the coming months, due to uncertainties in Europe, both economic and political, and the ECB’s delay in raising rates relative to the US central bank.

If he manages to climb the slope, savers could take advantage of it. “Anyone who wants to invest in dollars, for example in US equities, as part of a unit-linked life insurance (UC) or securities account, will benefit from greater purchasing power,” explains Philippe Crevel.

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A Livret A whose rate should be increased

Another investment whose yield is expected to change: the Livret A. The French added almost € 16.5 billion net to this regulated investment in the first half of the year, the rate of which will drop from 1% to 2% on 1st August, after an increase from 0.50% to 1% in February.

And its rate could still be raised … in February 2023. The increase in ECB rates has an effect on the interbank rate (€ STR), which, together with inflation, is one of the two components used to fix the Livret rate A, revised (or not) every six months. “The Livret A rate is calculated in relation to the average of the average inflation rate and the average of the € STR rates”, explains Philippe Crevel.

The € STR rate is currently 0.58% and is therefore expected to increase. In one year, inflation would increase by 5.8% in June, according to INSEE. By February 2023, “it should be pretty much around 6-7%, or even more, and the € STR will definitely return to near zero, or even slightly above,” the economist estimates.

Bankbooks are certainly a little more attractive

In addition to Livret A, bank books, which today show an average rate of only 0.09% according to the Banque de France, should benefit from slightly better remuneration. “Taxed bank books are being massacred today, in terms of remuneration”, points out Philippe Crevel. Unlike the Livret A, these booklets are subject to the single flat rate deduction of 30%. “Their interest is quite limited and they are mainly used by people who have already saturated their regulated brochures,” adds the economist.

Banks sometimes offer promotional rates on these brochures, for a limited period of two to three months, for example. We then speak of “super libretti”. “The rise in key ECB rates should facilitate promotions, which have somehow disappeared in recent years”, points out Philippe Crevel.

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But more expensive loans for borrowers

Finally, the monetary tightening by the Central Bank should have an impact on the level of rates on loans granted by commercial banks. And this time against individuals. However, markets and banks had expected key rates to rise. “The rates at which banks lend to their borrowers have already risen rapidly since last March,” remembers broker Meilleurtaux.

“This 0.50% increase (by the ECB, ed) will not drastically change the life of borrowers, who have already been subjected to repeated and rapid increases by banks for several months. We have been on daily inflation for some time now and it is not going to stop, “said Maël Bernier, a spokesperson for Meilleurtaux.” It is not unlikely that the average we see today, which is around 1.90% in 20 years, it will be around 2.25% in the fall, “he adds.

And rates could rise further, especially if the ECB decides to raise key rates again in the fall.

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