Cliff Taylor: Decent returns a challenge after An Post cuts rates

The weekend news that the interest rates on the whole range of An Post savings products were being sharply cut has left savers with even fewer options in the hunt for any kind of decent return. The only consolation is that there is pretty much no inflation at the moment, meaning for most people the real value of their savings is not being eroded.

There will be some who will feel it of course – for example anyone relying on a return from their savings to pay rent on a house could be in trouble, given the trend in rental costs. Most of those in trouble with high rents, however, are more likely to be younger people or families who don’t have much by way of savings in the first place.

For the average saver, it is more a case of standing still. Average consumer prices in April were a whisker – or 0.1 per cent if you want to be technical – below one year earlier. So the only consolation for savers is that the real value of their money – what it can buy them – is not being eroded, even with almost invisible returns in terms of interest.

For those willing to shop around, and to commit to regular savings or lock up their money for a year or more, some level of return is still available. But when you see new An Post rates with an annual return (AER) of just 0.33 per cent on a three-year bond, you can see that a key route whereby savers used to get a return in recent years has got a lot less attractive. This product used to offer an AER of 0.83 per cent.

This will give the green light to the banks to keep edging down deposit returns. Some €370 million of savers money was moved into An Post products last year, attracted by a range of relatively competitive products and the total amount of cash in them is close to €17 billion. Much of the money moving into An Post in recent years will have moved from the banks, who have long complained about An Post rates, last trimmed in October 2014.

This flow of funds to the State coffers via An Post looks likely to slow significantly this year, with returns cut sharply. All this makes perfect sense from the State’s point of view, as the NTMA – already sitting on a €20 billion or so cash pile – can now raise money from international investors at rock bottom interest rates.

But for savers, getting any kind of return is now a challenge. Those with existing An Post Savings Bonds or Certificates which have a period yet to run are in the fortunate position that they will earn a much juicier return than anyone buying one of these products from now on. Indeed those who bought into the first issue of the National Solidarity Bonds in 2010 will, if they are prepared to leave their money in for the full period up to 2020, earn an AER of 3.96 per cent. Helping the State by saving your cash with them did not look like a particularly good deal back then but now, for those who can afford to leave their cash in, it is the “tracker mortgage” of the savings world.

You won’t find those returns in savings products now. A number of banks offer reasonable returns on regular savings products, but hemmed around by terms and conditions and often only available for a period. Shopping around can get better returns on fixed-rate products for a year or more. Demand deposits offer hardly anything.

While there has been much focus on how mortgage and other borrowings rates are high due to a lack of competition in the market, deposit rates here are also uncompetitive compared to elsewhere in the EU, whether you judge by comparing the rate on new ordinary deposits – Ireland average 0.21 per cent in 2015 versus 0.65 per cent in the euro zone – or by looking at fixed rate offers. There is some sign of new competition, partly via brokers who can now offer deposits abroad, while advisers are also selling products which carry an element of risk, and charges.

But now that An Post has pared back its offers, the way is unfortunately clear for the banks to keep trimming their deposit rates, an area which brings far less flak on them than what they charge to borrowers.