Interest on Savings Accounts: How Bad Are Current Rates from a Historical Standpoint?

In today’s environment of low and even negative interest rates, the historically low nominal interest rates available to Swiss savers are a recurring theme. But there has been much less focus on real interest rates which account for inflation.

To find the real interest rates, moneyland.ch accounted for the inflation rate – the rate at which prices increased – for each analyzed year when calculating interest rates. The resulting real interest rates account for the fact that prices in Switzerland increased significantly in specific years. Comparing nominal interest rates with inflation reveals a much clearer picture of how much interest yields are actually worth.

moneyland.ch tracked the real interest on savings after account for inflation from the year 1933 to the present and compared these with nominal interest rates in Switzerland. The historical interest and return calculator on moneyland.ch served as the basis for calculations.

The results show that, taking inflation into account, Swiss savings accounts have delivered little real interest over the past 87 years. “Price increases have consistently diminished savings interest,” states moneyland.ch CEO Benjamin Manz.

Another interesting point: Swiss banks charging negative interest on savings is a new phenomenon. “But when inflation is accounted for, there have been periods in the past when real interest rates were in fact negative,” explains moneyland.ch analyst Silvan Wehrli.

In more exact terms: The real interest rates of Swiss savings accounts were negative in 36 of the past 87 years. That means savings account holders technically lost money in relation to prices increases during those years.

You can get a free overview of the historical interest rates of Swiss savings accounts using the form of the foot of this article.

Development of nominal interest rates

References to savings account interest rates typically denote nominal interest rates which do not account for inflation. The interest rates published by banks and those shown in the interactive savings account comparison on moneyland.ch are nominal interest rates.

The average nominal interest rate on Swiss savings accounts for the entire period between 1933 to 2019 was 2.45% per year.

According to data published by the Swiss National Bank, average nominal interest rates on savings over the period between 1934 and 1992 ranged between 2.10% per annum (1979) and 5.10% per annum (1992). The average nominal interest rate for the entire period combined was 3.1% per annum.

From 1992 onwards, nominal interest rates primarily declined, reaching a historical low in 2019 at 0.04% per annum. It is likely that 2020 will bring a new historical low point.

“In terms of nominal interest, Swiss savers have never had it as bad as they do today,” says Silvan Wehrli.

Development of real interest rates

But you get a very different picture when you look at real interest rates which account for inflation (price increases). Inflation and deflation (price decreases) are a key factor in determining the value of interest. “Money is effectively only as valuable as the goods and services which it can purchase. Over the years, the purchasing power of money has drastically decreased,” says Wehrli.

The result: Between 1933 and 2019, average real interest rates were positive in 51 years and negative in 36 years. The average real interest rate for the entire analyzed period is just 0.07% per annum.

Another interesting point is that since 1933, there have been many years in which real interest rates were lower than they are at present. The year 1941 had the lowest average real interest rate at -11% per annum, due to its high inflation rate.

Real interest rates on savings peaked in 1933 at 5.4%, thanks to that year’s low inflation rate.

Real interest rates in the past 20 years

The average real interest rate over the past 20 years (2000-2019) is 0.05% per year. Only 11 out of the 20 years delivered positive real interest, while 9 years had negative average real interest rates. Real interest rates ranged between a low of -1.35% per annum (2007) and a high of 1.4% per annum (2015).

How much interest would 1000 francs in a savings account yield?

If a depositor had invested 1000 francs in a savings account at average interest rates in 1933, their account balance in 2019 would have been 8214 Swiss francs. That translates into a yield of 2.45% per year. That may sound like a decent return, but the fact is that prices increased at a similar rate.

Taking inflation into account, the average real interest earned by the same depositor would be just 0.07% per year. So, in terms of real interest, the depositor achieved almost no return at all.

The picture is not much brighter for a depositor who placed 1000 francs in a savings account in 1980. By 2019, their account balance would be 2107 francs, which translates into an average yield of 1.88% per year. The average real return after accounting for inflation would be just 0.3% per year – a modest yield.

Swiss savings accounts versus Swiss stocks

A comparison of the historical returns of Swiss stocks with those of Swiss savings accounts reveals a clear disparity: “Over the long term, Swiss stocks have performed significantly better than Swiss savings accounts,” says Silvan Wehrli.

Nominal yields over the full analyzed period without accounting for inflation are as follows: The average interest paid by banks on savings account balances between 1933 and 2019 is 2.45% per annum. The average increase in the value of Swiss stocks tracked by the Pictet Index over the same period is 8.29% per annum. The average total yield delivered by savings accounts over the full analyzed period is 721%. The average total gain on Swiss stocks over the same period was 101,856%.

In other words, had an investor placed 1000 francs in a savings account in 1933, their savings account balance would have grown to 8214 francs by the end of 2019. Had the same investor invested 1000 francs in the Swiss stocks tracked by the Pictet Index, their custody account balance would have grown to more than 1 million francs by the end of 2019. That means their capital would have increased by more than a thousand percent.

The differences are equally pronounced when inflation is accounted for. After deducting the cost of inflation, the real interest delivered by the savings account since 1933 would be just 63 francs. The real return delivered by the stock investment would be 130,000 francs.

Future interest rate developments

There is no sure way to know how interest rates will develop. Still, the majority of experts expect the low-interest regime to continue. Additionally, many economists predict higher inflation over the mid-term, largely due to the coronavirus crisis. “Those predictions paint a bleak picture for savers,” says Manz. “In the not-too-distant future, interest paid by banks on savings may not be high enough to keep up with inflation.”

But savings accounts, fixed deposits and medium-term notes still serve a purpose. Stock investments can take many years to reach profitability. Swiss savings accounts and fixed deposits are still a good option for conservative savers which are not ready to accept short-term and mid-term losses.

More on this topic:
Historical interest rate and stock return calculator
Compare current Swiss savings account interest rates now