Deposit rates in Ireland are among the lowest in the eurozone. So why are savers being short-changed?
Although interest rates are on the rise, and look set to increase further over the coming months, the returns on offer to savers in Ireland have remained pretty low.
According to the Central Bank, the average interest rate on household deposits with an agreed term was just 1.02% in February in Ireland. While the equivalent rate in the eurozone was 1.92%. However many savers here will be earning far less.
So why is this the case? And should Irish savers be looking for alternative options for their money?
What's on offer right now?
If you have your money on deposit then the best rate is currently 1.50% AER with Permanent TSB. But you’ll need to keep your money locked away for five years.
AIB is only paying a maximum of 1% and BOI is only paying a maximum of 0.75%.
But with inflation still running at over 7%, and DIRT at 33% payable on any gains you make, your savings will be losing a huge amount of money in real or inflation-adjusted terms.
You can also invest in a state savings product. These rates were recently increased and the benefit is that any returns are tax-free. But don't expect a windfall. At the moment the best rate is a ten-year bond paying 1.50% AER or 16% in total over the ten years.
Why are savings rates so low?
1. Lack of competition
The level at which banks set deposit rates is partly based on competition.
Unfortunately after the exits of Ulster Bank and KBC, and before them Rabobank, there isn’t a huge amount of competition in the Irish banking sector these days.
Only three banks in Ireland are paying money on deposits right now (AIB and its subsidiary EBS, BOI and PTSB).
A lack of competition almost always spells bad news for consumers. And this is definitely the case for savers right now.
2. Too much savings in the Irish banking system
The remaining banks in Ireland are awash with savers' cash right now so they don’t need to offer decent rates to attract more money.
Banks have lots of money for two main reasons.
Irish households built up lots of savings during Covid, which they haven’t fully spent. And we’ve kept the good savings habit - Irish households are now among the top savers in all of Europe.
Also, when Ulster Bank and KBC announced their exits, around €25 billion which was on deposit with both banks largely flooded into AIB, BOI and PTSB, meaning the main banks have never been better capitalised.
3. Mortgage rates
Even though the European Central Bank (ECB) has hiked rates from 0% to 3.50% over the past year, the banks here have only raised their fixed mortgage rates by around 1.5 to 2 percentage points on average. And variable rates have barely moved at all (though they were high to begin with).
This is partly why Irish mortgage rates are now among the lowest in the Eurozone and have been for several months.
This is a big turnaround from this time last year when Irish mortgage rates were among the highest.
Irish banks have been able to use all the money they have from savers (and on which they’re paying little interest) to part-fund their mortgage lending cheaply.
So in many ways, Irish banks are keeping mortgage rates low at the expense of savers.
Whether that’s the correct approach will differ depending on whether you’re a saver or a borrower of course…
4. Negative rates - payback
For around eight years (between 2014 and mid-2022) the ECB actually charged banks for any money they kept on deposit with it.
The ECB's so-called 'overnight deposit rate' went as low as -0.50%, meaning at one stage, for every million that Irish banks left on deposit with the ECB, they were charged €5,000.
However Irish banks, unlike many of their European counterparts, did not pass this charge onto most savers. Yes, deposit rates were slashed to near zero, but in most cases banks did not charge ordinary savers for holding their money.
So in some ways Irish savers are now having to repay this previous ‘generosity’ of the banks…
What does the future hold?
The ECB is likely to hike its main lending rate from 3.50% at present to 4% by the end of the summer. And it may go even higher. So the banks will come under huge pressure to improve their deposit rates.
However it's likely savings rates will still remain well below the eurozone average for the foreseeable future.
What options do I have?
If you’re looking for a better return on your money, a good option might be investing through Raisin.
With Raisin Bank, Irish savers can easily access the savings rates on offer from banks all over Europe by signing up to its online account. And these rates are usually well above what's on offer from Irish banks.
For example, the best five-year fixed-term rate offered via Raisin Bank for someone with up to €100,000 to put away is currently 3.50% from Younited Credit in France.
Another option is Trade Republic, a Berlin-based digital investment platform, which offers investors easy access to buy and sell stocks relatively cheaply through its app. However any cash that you hold in your account which you haven’t invested, will earn 2% interest.
And if you have a longer-term savings goal, then placing your money into a life assurance investment policy with the likes of Irish Life, Zurich or Aviva, which will invest in a mix of stocks, commodities, property and bonds, could be a good option as it will provide the potential for far higher returns.
