Irish deposit rates have fallen far faster than interest rates at the European Central Bank (ECB) have declined. Consequently, as domestic deposit rates have moved lower, savers are struggling to secure an adequate return on their money. Banks are the real winners in this equation because they gain from a widening gap between what they must pay lenders to attract deposits and what they charge borrowers who take out loans.
In September 2014, the ECB last changed its main refinancing rate to 0.05 per cent. Irish savers could then secure an average 1.83 per cent interest rate on deposits up to two years. Since then – despite an unchanged ECB rate – domestic savers have seen their return drop to 0.98 per cent for deposits of similar duration. This creates a challenging environment for anyone who is dependent financially on these returns. As interest rates fall, this also adds to the cost of financing pensions, whether for companies or individuals, as larger capital sums are needed to buy retirement income.
Record low global interest rates reflect the efforts of central banks and governments to stimulate investment and to boost growth in an uncertain economic environment. However, for savers who are anxious to protect their savings, the rates offered remain derisory. The value of depositors’ money is eroded both by inflation and by a 41 per cent tax on interest payments.
In addition since January, investors with large sums on deposit are facing a potential new hazard. In future, under new European Union rules, major bank failures will not involve, as before, a bail-out by governments and taxpayers. Instead, they may well require a bail-in of depositors as happened in Cyprus in 2013.
It is hard to justify a 41 per cent tax rate on the savings of depositors when interest rates continue to decline, as do revenue receipts from the tax. But savers with money on deposit, who are trying to secure a return on what is regarded as a risk free investment, should not also have to worry about a return of their capital.