It’s a recurring question these days as consumers face ever higher costs to borrow money from banks: why are savings rates still so low?
As one On The Money reader wrote to us recently: “Negative interest rates are a thing of the past for the ECB [with interest rates] already at 3.5 per cent and heading for 4 [per cent]. Yet deposit rates in Ireland have hardly moved.”
The reader was not surprisingly underwhelmed when Bank of Ireland told him they could offer him the princely return of 0.49 per cent on his money if he agreed to leave it on deposit with them for a year.
“Effectively the banks are taking a second bailout from taxpayers who have deposits,” said our reader, who had heard that English savers were able to get as much as 1.5 per cent for locking their savings away for a year.
I’m renting the home of my emigrant brother. What are the tax implications if he signs it over to me?
It won’t do anything for his blood pressure but UK banks can do better than that, with some UK banks offering above 4 per cent interest on 12-month savings terms now. Even at the blue-chip high street banks, like HSBC, you can get up to 3.5 per cent on your money.
Of course, it needs to be said that UK interest rates – and therefore borrowing rates – are higher than those prevailing in the euro zone. The Bank of England raised official interest rates by another quarter point on Thursday, to 4.25 per cent, a week after the European Central Bank raised its rates by a half percentage point to 3.5 per cent.
But there are also more attractive rates on offer within the euro zone, even to Irish savers.
Raisin.ie offers Irish savers access to a range of accounts with banks in Portugal, Italy, France, Austria, Latvia and Slovakia.
As of now, the most competitive offering for someone with €5,000 in savings that they can lock away for a year is 3.21 per cent with BluOr bank in Latvia, or 3.05 per cent with Younited in France, which may be the better option as, unlike Latvia, it does not levy a withholding tax on your savings and interest, although you will still need to declare it for deposit interest retention tax (DIRT) on your annual tax return in Ireland.
True, these banks are not exactly household names over here but Raisin says that all are covered by the same sort of deposit saving guarantee that applies in Ireland, where the first €100,000 of savings by an individual in any bank are fully protected.
To be fair, you can do better here than the rate our reader discovered with Bank of Ireland. Permanent TSB is offering a rate of 1 per cent on savings locked in for the same period, but that is still a derisory amount when you consider ECB rates are now at 3.5 per cent and when you bear in mind that the State will take one-third of any interest you make through DIRT.
It’s a topical issue because, according to the Central Bank, Irish consumers have €132 billion on deposit, having acquired a strong savings habit during the Covid lockdowns that appears to have largely been retained since. That’s a lot of money to be earning next to nothing. So what’s happening?
The banks will be very quick to tell you that they are having to restock their coffers to offset the eight-year period – from 2014 to last July – when they were being charged by the European Central Bank (ECB) for putting customers’ money safely on deposit with the Frankfurt institution, a cost they never passed on to any but the largest savers. And that’s true.
But they are now getting 3 per cent on that same money when it is deposited with the ECB and are offering consumers only a small fraction of that.
The banks will also note that although ECB rates have jumped by 3.5 percentage points over the past nine months, Irish banks have been very restrained in passing on those increases – apart from for those on tracker mortgages whose rates always move in tandem with ECB rates and who have, in any case, been the group that benefited most from ultra-low interest rates over recent years.
According to Bonkers.ie, you can still secure variable mortgage interest rates of 3.15 per cent with AIB lender Haven, a figure that is well below the current headline ECB rate.
And you can lock in a loan for periods from four to seven years at Bank of Ireland for rates as low as 2.9 per cent to 3.25 per cent – all below the current ECB rate. The best one-year rate is just ahead of the headline rate at 3.6 per cent, which is a very modest margin.
It is certainly true that the average rate on new Irish mortgages has fairly swiftly moved from the top two on the list across the euro zone to very close to the bottom of that same list over the past nine months. And a significant reason for that is that most lenders here are not having to rely on money markets where rates are higher, instead using some of the money deposited with them by customers.
Banks also argue that they are actively trying to keep a lid on the interest rate charged on loans in a market already contending with a cost-of-living squeeze and high energy prices so that it can avoid creating a longer-term issue with non-performing loans. Of course, that is partly to their own benefit as well: managing non-performing loans is an added cost.
In any case, as our reader suspects, it is effectively Irish savers who are funding this policy of keeping loan rates lower than the market suggests they should be.
It has always been the case that savings rates would climb more slowly than lending rates. They also fall more rapidly than lending rates at the other end of the interest rate cycle. And right now, after the Covid savings boom, banks have far more of our money than they need. They certainly do not need to be offering more attractive rates to secure our business.
Ireland’s banks have been quite clear that savers should not expect any dramatic increase in the rates on offer for their money. In a recent briefing with analysts, AIB apparently indicated that savers would get the benefit of no more than 30 per cent of any increase in ECB rates this year.
It’s cold comfort for people like our reader. The best we can suggest is that they look further afield for better value for money through operators like Raisin.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed our last newsletter, you can read it here. Also, to ensure you continue to receive On The Money, be sure to add the email address you receive the newsletter from to your safe senders list.