Financial institutions plan to target the deposit account sector with attractive new products

The decision by the European Central Bank (ECB) to hold off making another cut in interest rates has given some temporary respite to savers with money languishing in safe but unrewarding deposit accounts.

Interest rates on deposits at the main banks have ranged from paltry to non-existent in recent years, but with economists predicting that rates will start to creep upwards after one more cut, things should, in theory, improve in the medium term.

Meanwhile, some financial institutions have signalled that they will try to build up their deposit-customer base in 2004.

Permanent TSB has described its new postal account, which offers a rate of 2 per cent on demand for balances of €5,000 or more, as "a major assault" on the deposit market, with a rate that is eight-times higher than those available on demand from the main clearing banks.

Depositors have been "the big losers" in the current low interest rate environment, according to Mr Niall O'Grady, head of marketing at Permanent TSB.

Advertisements for the postal account had been scheduled for last week but were delayed until this week following the escalation of the postal strike.

The Save Direct account has an interest-rate price promise that commits it to tracking the ECB rate - currently 2 per cent - for the rest of 2004 and staying within 0.5 of a percentage point from then on.

On-demand accounts offered by the main banks typically yield as little as 0.025 per cent, and often less, Permanent TSB says.

But look beyond the main banks to financial institutions such as Northern Rock and Anglo Irish Bank and savers should be able to find comparable or better interest rates on accounts that can be operated over the telephone and have minimum balances that are lower than €5,000.

Northern Rock has launched a new online demand account offering a variable rate of 2.6 per cent gross per annum for balances of €1,000 or more. The account, which is available through www.northernrock-ireland.ie, has a price promise to match the ECB rate until 2006.

The average demand rate paid by other institutions on €1,000 is 0.068 per cent, according to the bank. This gives rise to an interest payment of 68 per cents per year on €1,000, compared to €26 gross (before Deposit Interest Retention Tax at 20 per cent) from Northern Rock.

Anglo Irish has a rate of 2 per cent gross on its instant access account, which has a price promise to match the ECB rate until 2006 and requires a minimum deposit of €2,000.

If Anglo customers are prepared to be more flexible on access to their savings, they can get slightly higher rates.

Elsewhere, EBS has introduced a savings bond for members that offers a rate of 2.75 per cent gross, fixed for one year. The minimum balance is €1,000 and there is no access to the money for the full year-long term.

No matter how many new deposit accounts are set up this year, the market still lingers in the shadow of the Government's Special Savings Incentive Accounts (SSIAs), closed to new customers since the end of April 2002. Holders of SSIAs receive €1 for every €4 saved, which can be accessed when the accounts mature after five years.

The Government bonus will be much welcomed by deposit SSIA holders, especially since the interest on variable-rate deposit SSIAs has inevitably decreased in line with ECB rates.

In fact, Bank of Ireland cut its variable-rate deposit by a quarter of a percentage point last month so that it fell below the ECB rate.

It is now only one of two institutions offering SSIA variable rates at less than 2 per cent, the other being Ulster Bank.

Some SSIA account providers, such as EBS, who started out with a lower variable rate than Bank of Ireland, now have a better rate at a time when customers' accumulated monthly contributions are at their highest total to date.

Again, Anglo Irish has the best rate. Promises by Northern Rock and First Active to match the ECB rate for the duration will give some comfort to variable-rate deposit SSIA holders kicking themselves for not locking in at a fixed rate, but both institutions require higher-than-average monthly minimums, at €50 and €60 respectively.