Mario Draghi, the European Central Bank (ECB) president, is the first major central banker to cut the key interest rate below zero! Meaning that banks who park their money at the central bank pay for doing so. But what about the key question – what happens if banks will not lend? Will the ECB apply pressure on the high street bank to follow suit and penalise savers in order to circulate money? Is this a sign of things to come for people who have striven all their lives to save cautiously and this is their recompense?
The ECB operates at the heart of the Eurozone by setting monetary policy, with the main objective of maintaining internal price stability keeping inflation in check. The fact remains even with the current interest rate offered by deposit-taking financial institutions one is paying for having one’s money on deposit if you factor in inflation. This occurs when the inflation rate exceeds the nominal interest rate, i.e. when the real interest rate is negative.
Inflation is the route of all evil in an economy; it erodes the purchasing power of money and has caused untold damages, causing the collapse of powerful nations. That said, there are signs of late that governments/central banks have been overtly too hawkish on inflation and if we are not careful we may face a period of deflation.
Well, I have to admire the charismatic congenial Italian banker, Mario Draghi; after all it is he who has the difficult task to conjure up a way to get banks to lend to credit-starved small companies. Let’s hope that the recently-announced €400bn of cheap loans will find its way to the heart of the problem, which is to entice small companies to hire more people and use their entrepreneurial skills to tap into new markets. It is small companies that employ circa 80% of the workforce in most modern economies, with little help from government and banks – just their ingenuity.
Despite all the rhetoric of governments pontificating to the electorate that one should have private savings for retirement, they need you to spend to get them out of trouble and get the economy back on track – or they’re out of a job.
Double-edged sword – What does one do?
Like all things in life, it’s about finding equilibrium – not to live a hermit’s life and deprive oneself from the pleasures of life, but to be happy and invest wisely. Happiness is not a destination; it is a way of life. The balance between saving and spending is always a difficult one to assess. And also, how much time do you dedicate to this mathematical equation? ‘Not enough’ is the answer in most cases.
It is essential to maintain a level of cash in the bank for prudence but when it costs money to keep it in the bank, one has to ask why! I am not advocating complete withdrawal but you need to qualify whether or not you should seek a level of diversification.
Choose the jurisdiction that is right for you
There are many offshore jurisdictions with tax-friendly policies that offer attractive investment opportunities to expatriates. When choosing the right jurisdiction it is paramount to establish a number of key points:
▪ Domicile status
▪ Inheritance tax
▪ If and when you will be returning home
To find out what investment opportunities are available to you and in which jurisdictions you will benefit most from by investing your money, speak to a locally focused consultant with international knowledge and a comprehensive understanding of available options on how to invest your excess funds.
Blacktower Financial Management (International) Limited is licensed by the Gibraltar Financial Services Commission Licence Number 00805B. Blacktower Financial Management Limited is authorised and regulated by the Financial Conduct Authority in the UK.
By António Rosa
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Antonio Rosa is a Financial Adviser at Blacktower Financial Management (International) Management.
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