Wealth Low interest rates: what you need to know

In the current low interest environment, it’s almost impossible to earn interest on your savings. To invest your money profitably, you’ll need to find alternatives. In this article, we explain why we are in a global low-interest rate environment, how this can affect retirement provision – especially for women – and what low interest rates mean for investors.

Today’s low interest rates are the result of the various economic crises of the last two decades and the associated expansionary monetary policy of central banks. Interest rate cuts are a monetary policy measure taken to stimulate the economy. The aim of lower interest rates is to remove the imbalance between intentions to save and investment plans, because low interest rates make saving money less worthwhile. By contrast, investing money – for example, lending it to a company that uses the loan to invest in its business – is made more attractive, which in turn stimulates the economy.

As a consequence of the 2008 financial crisis, central banks like the Swiss National Bank (SNB) have massively reduced interest rates. Following the ensuing sovereign debt crisis in the euro zone, many central banks even felt compelled to introduce negative interest rates.

But even before these crises, global interest rates had fallen due to low inflation and an aging population.

Interest rate cuts can be understood as a financial injection for the economy, but one which also has side effects. For example, low interest rates trigger a veritable “hunt for yield” – for both private and institutional investors, such as pension funds.

With low or negative interest rates, your savings account pays hardly any interest. If inflation is higher than the interest rate, you end up paying to save, because the real value of your money – its purchasing power – is reduced by more than the increase in your balance. However, women in particular are often reluctant to invest their money. They often leave investment decisions to their partner, for example, because they believe they do not have enough financial knowledge to make good investment decisions.

Low interest rates are also a challenge for pension funds, which have to find new ways to invest money profitably. This is the only way they can meet their contractually stipulated obligations and pension payments. In recent years, many pension funds have therefore been forced to reduce the pensions paid out. This is especially noticeable in retirement provision for women, and there are several reasons for this: lower incomes, lower salaries, career breaks and lower pensions, plus a smaller asset pool from which to finance a longer life.

There are many different ways in which wealth can be invested other than a savings account. When interest rates are low, the following asset classes also offer opportunities for you as a woman investor:

With stocks, you acquire a share of a company listed on the stock exchange. The potential returns vary. Shareholders generally receive a return in the form of a dividend, provided the company is sufficiently successful to pay them out.

As a woman investor, you can also achieve capital gains by selling your stocks at a higher price than you paid for them. However, with stocks there is always a risk of making a loss.

Bonds are a less risky form of investment that still yield returns, though at generally lower levels than with stocks. Unlike stocks, with bonds you are loaning your money to a company or a state institution. In return, you receive regular interest payments and your capital is returned to you at the end of the term.

However, bonds also carry certain risks, such as the risk of default, loss of value due to rising interest rates or an exchange rate risk in the case of foreign bonds.