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

This is a first since 2011. The European Central Bank (ECB) raised its interest rates on Thursday 21 July. They increase by 50 basis points (0.50%), when an increase limited to 25 points was initially expected. The institution thus intends to fight against galloping inflation in the euro zone, in a complex macroeconomic and geopolitical context, between the war in Ukraine and the risks to Europe’s gas supply.

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


Faced with inflation, the ECB raises its rates higher than expected

More profitable euro life insurance funds

Euro life insurance funds, in which the capital invested is guaranteed, should therefore benefit from the rise in interest rates and gradually become more profitable. “However, there is an effect of inertia, linked to the fact that insurers have a stock of bonds that they renew as they go along,” notes Philippe Crevel. In other words, the return on euro funds should rise less quickly than interest rates on the bond market.

As a reminder, the euro funds of life insurance contracts are invested in sovereign bonds (loans issued by States) 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, ie higher interest. “On the other hand, a rise in rates can have a negative effect on the nominal value of the bond. It is necessary to go to the end of the obligation to obtain its full repayment. If you resell it before, you can 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 in the American markets

The ECB rate hike should favor a stronger euro against 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 served as a safe haven. The euro even fell below parity with the dollar in mid-July. In the wake of the Central Bank’s announcement, it was more vigorous against the American currency. However, it is likely to remain relatively low over the next few months, due to the uncertainties in Europe, both economically and politically, and the delay of the ECB in raising its rates compared to the American central bank.

If it manages to go up the slope, savers could benefit. “Those who want to invest in dollars, in American equities for example, within the framework of unit-linked (UC) life insurance or a securities account, will benefit from increased purchasing power”, explains Philippe Crevel.

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A Livret A whose rate should be raised

Another investment whose yield should change: the Livret A. The French added nearly 16.5 billion euros net to this regulated investment in the first half of the year, the rate of which will drop from 1% to 2% on August 1, 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, along with inflation, is one of the two components used to set the Livret A rate, 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”, specifies Philippe Crevel.

The €STR rate is currently at 0.58% and should therefore increase. Over one year, inflation would increase by 5.8% in June, according to INSEE. By February 2023, “it should rather be around 6-7%, or even more, and the €STR will certainly come back close to zero, or even a little above”, estimates the economist.

Bankbooks surely a little more attractive

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

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

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But more expensive loans for borrowers

Finally, monetary tightening by the Central Bank should have an impact on the level of lending rates granted by commercial banks. And this time, against individuals. However, the markets and banking institutions had anticipated the increase in key rates. “The rates at which banks lend to their borrowers have already increased rapidly since last March,” recalls the broker Meilleurtaux.

“This 0.50% increase (from the ECB, editor’s note) will not drastically change the lives of borrowers, who have already been suffering from repeated and rapid increases from banks for several months. We have been on daily inflation for a while now, and it is not about to stop,” said Maël Bernier, spokesperson for Meilleurtaux. “It’s not unlikely that the averages we see today, which are around 1.90% over 20 years, will be around 2.25% in the fall,” she adds.

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

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