The retreat in market-based interest rates, anticipated ahead of the European Central Bank’s anticipated rate reductions, is reshaping how Spanish banks price their products. In January, households faced an average yield of 2.377% on new time deposits, down from 2.578% in December. This marks the first month-to-month drop in new-deposit rates since August and stands as the steepest decline since June 2013, when the ECB cut rates by 0.219 percentage points and, today, by 0.201 as well.
The drop has been notably sharper than the euro-area average, where banks have also boosted savers’ earnings on time deposits since the inflation spike began. In January, euro-area banks pledged 3.2% on new deposits from families, compared with 3.29% in December. As a result, the gap between Spanish banks’ deposit remuneration and euro-area levels widened to 0.823 percentage points, versus a margin of 0.166 points in December 2021 when the ECB started tightening policy in response to rising inflation.
The mean interest rate on checking accounts in Spain — where households hold 86.3% of their bank deposits — held steady at 0.15% in January for the third straight month, versus 0.38% across the euro area. Earlier cycles of rate increases saw savings distributed more evenly between these accounts and term deposits, which accounted for roughly half to sixty percent of household balances. In plain terms, banks currently pay far lower interest to households than in past episodes. In January, the savings deposit balance rose by 6.661 billion, while the checking-account balance declined by 15.209 billion, yet the gap between the two remained pronounced (136.033 billion versus 861.012 billion, respectively).
Cheaper Credit
On the flip side, borrowing costs are easing for many borrowers. Yet caveats remain. In January, the rate on new mortgages slipped for a third consecutive month, from 3.74% to 3.7%, edging below the euro-area average of 3.87%. The average rate on new corporate loans also eased, from 5.04% to 4.93% (5.22% in the euro area). However, rates on new consumer loans to households rose from 7.69% to 8.08%, and loans to families for other purposes climbed from 5.68% to 5.89%. Additionally, the average rate on outstanding mortgages stayed at 3.71% due to the accumulated cost of past mortgage payments as the Euribor rose over the last two years.
Banks argue that weak demand for credit and abundant liquidity lessen the need to attract deposits to fund loans, reducing pressure to raise remuneration. In January, lenders approved 4.599 billion in mortgages, down 10% from December. For businesses, lending slowed to 25.496 billion, down 28.9% from the prior month.
ECB Watch
The January drop in new-deposit rates aligns with a two-year pattern in Spain’s banking sector, which has shown restrained client remuneration. Banks have raised savings-on-term product rates less than in prior rate cycles and remain among the euro area’s sectors that have increased them the least. Management teams have signaled that they do not expect a dramatic shift in this pattern in 2024, as reflected in their annual results presentations.
The fall in the Euribor, a key reference for the rates banks charge each other, explains the January dip in deposit remuneration. From October to January, the index fell from 4.16% to 3.609%. In February, after the ECB signaled a higher likelihood of rate cuts in the summer rather than in spring, the Euribor ticked up again to 3.671%, implying that the decline in deposit remuneration could slow or briefly reverse. Looking ahead, a lower-rate environment is expected to translate into generally lower deposit rates and cheaper lending options, albeit with some volatility from policy signals and market dynamics.
Source: ECB data