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Deposit account interest rates fall behind inflation
22 May 2011 By Jon Ihle, Markets Correspondent

Irish savers have been left with no deposit account options to protect their cash from the rising cost of living.

As consumer price inflation continues to rebound from a nearly two-year decline, the interest rates available on even the best-paying deposit accounts now are not high enough to beat inflation over a year, once deposit interest rate tax (Dirt) is taken into account.

The increase in Ireland’s consumer price index hit 3.2 per cent for the year to April, in line with abroad European trend that has caused the European Central Bank (ECB) to start tightening lending rates. Banks would have to offer interest rates on deposits of nearly 4.5 per cent to give savers a net return better than that figure.

But even market leading regular saver accounts from Permanent TSB, Ulster Bank and EBS paying 4 per cent per year yield just under 2.9 per cent after Dirt.

Irish banks are desperate to attract depositors to secure more stable funding, reduce their leverage and wean themselves off Central Bank support. This has led to fierce rate competition, even as the ECB has kept base rates at record lows. An inflationary trend could force them to boost rates to keep savers. AIB, Bank of Ireland, EBS, Permanent TSB, KBC and Ulster Bank all told The Sunday Business Post they were keeping rates under review.

The Irish savings rate continues to be robust as consumers cut back on spending and pay down debt. The Central Bank’s quarterly financial survey found that Irish household wealth rose by 6 per cent in the last three months of 2010 as people reduced their liabilities.

As mortgage interest rates rise due to increases both in variable rates and the ECB rate, banks should have an opportunity to reprice deposit rates upwards without threatening margins further.