AIB to hike charges on deposits with negative rates as ECB long-fingers rate tweaks

AIB plans to hike its charge on deposit accounts subject to negative rates to 0.75 per cent, the highest among Irish retail banks.

The latest move means AIB increases the burden on large savers while continuing to protect households and businesses with less than €1 million stored with the bank.

Meanwhile, although AIB signalled early last year that it planned on applying negative rates on personal accounts holding more than €1 million by the end of 2021, that will now only take effect from May.

The bank began telling customers on Monday about the changes.

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Accounts

AIB applies a negative rate of minus 0.5 per cent on affected accounts, in line with the charge the European Central Bank (ECB) imposes on banks for excess deposits placed with it.

In 2014, the ECB became the first major central bank to introduce a negative deposit rate policy, in an effort to push banks to lend more and boost inflation and economic activity.

While euro zone inflation is running at 2½ times the ECB’s target of about 2 per cent, the central bank is sticking to the line that it does not plan to increase its rates this year as it views the spike as a temporary phenomenon triggered by a reopening of economies following Covid-19 lockdowns.

Irish banks were initially reticent about passing on the pain of negative rates to customers.

However, they have been widening the net in recent years as they grapple with excess deposits, a problem that has been compounded by a surge in household savings during the pandemic.

“AIB has insulated the vast majority of our customers during a sustained period of European negative interest rates. The huge growth in customer balances, especially during the pandemic, has increased the cost to the bank of providing current and deposit product services, including negative interest rate costs,” a spokesman said, confirming the rate and threshold changes to The Irish Times. “As a result the bank has continued to keep its negative interest strategy under constant review.”

Threshold

Last year, AIB lowered its threshold for business deposits subject to negative rates from €3 million to €1 million, a threshold that has also been adopted by Bank of Ireland and Ulster Bank, who each apply negative rates of minus 0.65 per cent on affected accounts. Bank of Ireland also began charging personal customers above this level late last year.

AIB said the higher negative rate of 0.75 per cent would take effect from the end of March.

Some €12 billion of AIB’s almost €91 billion of deposits were subject to negative rates as of the end of September, according to its latest trading update. It had planned to have €16 billion of deposits within this category by the end of the year. The spokesman declined to give an updated figure.

The outlook for ECB rates is in contrast with some other major central banks. The Bank of England increased its main rate last month in reaction to a spike in consumer prices following an uneven reopening of economies globally from Covid-19 lockdowns.

The US Federal Reserve has indicated it plans to hike rates three times this year, though financial markets are increasingly factoring in four increases. Neither have ever applied negative interest rates.