Inflation has been on the rise since the beginning of the year, and is set to accelerate further in the coming months. With the Livret A interest rate at a record low of 0.5%, the government will have to make a choice: raise the rate or leave it unchanged to encourage households to consume. A delicate issue in an election year.
A political choice
Inflation has been back on track since the start of the year, and in May reached the 2% target set by the European Central Bank. In France, it stands at 1.4%, but is likely to rise further in the months ahead. The phenomenon was expected, but economists were predicting it for the end of the year.
Currently, the Livret rate is 0.5%. In concrete terms, the sums invested in Livret A passbooks are losing value, as the difference between the inflation rate and the rate on France's favorite savings product does not allow for a positive real return. In June, the real rate of return on Livret A savings accounts is estimated at -0.8%.
However, since the beginning of the health crisis, the Livret A savings account has seen record inflows, as the French appreciate its flexibility and the possibility of depositing or withdrawing their savings according to their needs.
Since last year, the Livret A interest rate has been subject to a new calculation formula: it takes only partial account of inflation, as it is calculated on the basis of the half-yearly average of the inflation rate and interbank securities rates.
The Banque de France sets this rate twice a year, in January and July. However, the decision to revise it rests entirely with the Ministry of the Economy. In the midst of an election period, this is a political choice which, given the appeal of this savings product to the French, is not without impact.
Encourage consumption or increase Livret A interest rates?
Currently, the rate on interbank securities is negative, at 0.54%. Consequently, for the Livret A interest rate to be revised in line with the new calculation formula, average inflation over the past 6 months must exceed 1.5%.
Although this threshold has not yet been reached, with inflation having risen from 0.6% to 1.4% between January and May, the question is likely to arise soon, probably from January 2022 onwards.
The government will then be faced with two choices: leave the Livret A interest rate unchanged, or decide to revise it. In the former case, the decision would be consistent with the government's desire to encourage consumption, after more than a year of record savings by French households. On the other hand, when he decided to lower the rate to 0.5%, Finance Minister Bruno Le Maire stated that the Livret A was no longer intended to protect households from inflation.
But in making this choice, the government is also exposing itself to the anger of the French, who are very attached to this savings product. According to the consumer association CLCV (Consommation Logement Cadre de Vie), the inclusion of interbank securities in the new formula for calculating Livret A interest rates is inconsistent and runs counter to the very idea of popular savings.
However, according to some economists, inflation will not necessarily accelerate over the coming months, and could gradually smooth out, particularly as commodity prices normalize.