Deposit rates finally rise but ‘the devil is in the detail’
When the banks published their half year results in the early part of last month, it was clear that pressure was going to mount on them to improve the returns that they have been offering depositors.
All of the main lenders reported bumper profits for the half year with interest income and interest margins looking very healthy indeed.
That came on the back of the series of interest rate increases announced by the European Central Bank since July of last year.
Although the banks hadn’t passed the full extent of the rate hikes on to their non-tracker mortgage products, they had passed even less of the cumulative increases on to those with deposits.
Criticism mounted from campaigners and politicians with the Finance Minister and the Minister for Further Education among those calling on the banks to pass on the benefit of rate increases to those with deposits.
And the deposits are indeed substantial with households squirreling away a collective €150 billion, according to the latest figures, most of it generating little or no return.
In fact, the value of the money has been eroding steadily in the current inflationary environment.
Why have the banks been so slow to pass rate hikes on to depositors?
In truth, because they don’t really have to.
Banks offer a return on deposits because the money is generally valuable to them in that they can lend some of it out and that which they don’t have to hold in reserve they can put on deposit with the Central Bank where they are now earning 3.75% (the ECB deposit rate).
Here, depositors crammed money into deposit accounts when rates were at rock bottom. In other words, the banks don’t really have to incentivise us to put money into accounts.
In fact, for a period of several years, it was costing the banks to hold deposits because they were being charged by the Central Bank for parking excess cash in the era of negative interest rates.
To their credit, the banks held off from passing those negative rates on to most customers.
Only very large-scale depositors, like high-net-worth individuals and businesses, were latterly charged negative rates.
That is likely part of the explanation for the inertia in passing improved deposit rates on to savers now.
So, what has happened?
In the past week, all three of the main banks as well as the National Treasury Management Agency, which runs the State Savings products, announced that they were hiking the rates that they offer depositors.
Returns of up to 3% per year – for a defined savings period – are being made available on certain products.
Each of the products have their own conditions and limits attached, but generally the developments are to be welcomed.
It is important to note, however, that because the banks are increasing deposit rates, it doesn’t automatically transfer to all savings and deposit accounts.
Regular deposit and current accounts – which around 98% of depositors have money sitting in – are still generating scant returns.
If consumers want to take advantage of these products, they have to seek them out and, in some circumstances, they will have to be willing to put their money away for a period of time to get the full benefit.
Bank of Ireland
Strangely, the one lender that doesn’t have a state shareholding was first out of the traps with an improved deposit rate offering.
Bank of Ireland announced a headline grabbing 3% rate on its SuperSaver Account.
This account allows the depositor to save up to €2,500 a month.
The 3% rate applies for the first 12 months, after which a rate of 2% will apply on balances up to €30,000.
It is also increasing to 2% the interest available on its Mortgage Saver accounts on balances up to €15,000.
A rate of 0.5% will apply on balances above €15,000 and there is bonus interest of €2,000 if the customer draws down a Bank of Ireland first-time buyer mortgage within 30 months of opening the account.
The bank is also increasing to 2% the interest rate applicable to its Regular Saver accounts on balances of up to €12,000, with a rate of 0.5% applying to balances above that amount.
In the early days of the rate hiking cycle, Permanent TSB led the way on deposits here with a fairly respectable offering on its 5-year deposit account.
The other banks have caught up since but not to be left behind, Permanent TSB announced a 3% rate on its three-year and five-year fixed term accounts this week.
A new rate of 2.5% will apply to its Regular Saver products.
The new rate will apply to both the Online Regular Saver and the 21-Day Regular Saver account for balances of up to €50,000.
Permanent TSB said this was the highest limit in the market for Regular Saver products.
On Friday morning, AIB and its subsidiary EBS became the latest movers on deposit rates.
AIB’s online saver account is to offer 3% interest on amounts from €10 to €1,000 per month for 12 months.
Customers can open up to four accounts for ‘different savings needs’, allowing them to earn a rate of 3% on amounts up to €48,000 a year.
However, a rate of 0.25% will apply after the monthly threshold is reached on each account.
The bank also announced changes to its fixed term deposit products with rates of up to 3% on its 2-year term deposit accounts, which must have a minimum balance of €15,000.
EBS’s Family Saver rate of 3% will apply to monthly savings of between €100 and €1,000 for the first year. A rate of 1.25% will apply from year 2 onwards.
Hot on the heels of AIB came the NTMA with its enhanced rate offering on the State Savings products.
From the start of October, the Three-year Savings Bond will offer a return of 4%, the Five-Year Savings Certificate will go to 9%, the six-year to 10% and the 10-Year National Solidarity Bond rate will go from 16% to 22%.
The variable rate on the State Savings deposit account will increase from 0.05% to 0.75%.
As the State Savings Schemes are priced over the lifetime of the products, they have to be broken down to their AER, or Annual Equivalent Rate, in order to provide a direct comparison with the banks.
The three-year product translates to an AER of 1.32%, the five-year to 1.74%, the six-year offers 1.75% annually and the ten-year, around 2%.
The State Savings Bonds are free from DIRT (Deposit Interest Retention Tax), which is levied at a rate of 33% on the interest gained in the banks, making the state products slightly more valuable when the tax element is taken into account.
Which is the best product?
Each undoubtedly offers a more attractive rate of return than has been offered up to now, but it’s up to consumers to seek out these products if they aren’t already depositing money in such accounts.
As regards their attractiveness, it’s swing and roundabouts really.
“The devil is in the detail,” Daragh Cassidy, Head of Communications with bonkers.ie said of the recent moves.
For example, although Permanent TSB offers the highest limit on the market for its Regular Saver products, for those with amounts over €50,000, the rate of return drops considerably to 0.01%.
Similarly, AIB and Bank of Ireland’s rate offerings drop back – but not by as much – once thresholds are breached, but the thresholds are lower.
And with the State Savings Schemes, although the headline rates are lower, the tax-free element of those products has to be factored in too, as Robert Whelan, Managing Director of Rockwell Financial pointed out.
“If you’re getting 2.5% on the state savings, it’s the same as getting up to 3.7% in the banks,” he explained, pointing to the DIRT-free nature of those products.
However, he said he believed there was still scope for better returns on the state savings.
“They’re the best when you consider them net of DIRT, but in order to get the better return, you have to leave them in for longer. The 10-year rate needs to be improved,” he said, citing the current inflationary environment.
“Inflation risk is not something we’ve had to think about for 20 years. We’ve had pretty stable inflation, but now it’s real. If you’re getting 2% interest and inflation is at 3%, you’re losing money,” he explained.
Applying that to the over €140 billion of deposits sitting in banks last year when the inflation rate was running at close to 6%, he calculates that over €8 billion has effectively been ‘sucked out of the economy’ in real terms when the erosion of spending power of that money is factored in.
Are mortgage rates likely to go higher now?
That is the danger with the move to pressure banks into providing better returns to depositors.
Asked about their apparent inertia in passing higher rates of return on to depositors at the recent reporting season, the banks responded that they had to strike a balance between what they charge mortgage holders and that which they offer to depositors.
The implication of that is that if the balance is tilted towards one side of the equation, it will have to be balanced on the other side.
Daragh Cassidy said it might be a case of ‘careful what we wish for’.
“Higher deposit rates could be at the expense of higher mortgage rates for first-time buyers,” he pointed out.
“It’s likely Bank of Ireland will announce a hike to its mortgage rates over the coming weeks – though it has to be said its fixed mortgage rates in particular are very low given where ECB rates are right now,” he suggested.
Robert Whelan agreed that mortgage rates were likely to go up further in any case, as long as the European Central Bank doesn’t cut rates in the coming months.
“The banks got a lot of money from the markets when it was cheap and it was sitting there and they’re using some of that now to offer competitive rates, but as soon as that is used up, rates will go higher,” he explained.
Are deposit rates likely to go higher again?
Probably, but some of that may be down to the fact that the ECB continues to raise interest rates, which may not be a welcome development for most.
As deposits – which soared to historic highs during the pandemic – are gradually wound down as people loosen the purse strings, or simply dip into their savings to get them through higher living costs, deposits will inevitably become more attractive and valuable to banks, and they may start paying more for those funds.
It will probably be some time before we see any further significant moves from the banks.
And that may be largely down to the lack of competition in the market. There is no sign of a challenger coming into the market to put it up to the main lenders on the borrowing or savings fronts.
Can I do better with my spare cash?
It’s recommended that anyone should have at least three to six months of living expenses set aside as a form of ‘rainy day fund’ to cope with unexpected expenses or unforeseen events, like the loss of a job.
Beyond that, people should be looking at making their money work either with term deposit accounts that offer some kind of return or with investments.
For those who may still not be happy with the rates of return on offer from the Irish banks, they can look further afield and seek better returns from banks in Europe.
Minister for Public Expenditure Paschal Donohoe – who is currently President of the Eurogroup of Finance Ministers – said it would not be ‘unpatriotic’ for people to move their money abroad and they were free to do so if they were unhappy with what was available in the Irish market.
There are websites that provide prospective depositors with a menu of interest rates elsewhere in Europe and they will also act as a brokerage.
One such site – Raisin – publishes a weekly update on the best rates available across Europe.
Latvian bank, BlueOr, where deposits of up to €100,000 are protected under the Latvian Deposit Protection Fund, was this week offering rates of up to 4.2% on its 12-month deposit account.
“Signing up is relatively simple and only requires one online registration,” Daragh Cassidy explains.
“From there, customers can easily choose from numerous savings accounts from banks all over Europe and manage their accounts entirely online too.”
Alternatively, there’s the option of putting money towards retirement. Pensions are one of the most tax-efficient means of saving.
There is no tax on contributions up to a certain limit and savings grow tax-free.