Opportunity for savers to be informed

On the 22nd of July, the Central Bank published an Economic Letter, ‘The Future of Irish Household Deposits: A European Perspective’. The letter stated that while household deposits increased across all euro-area countries during the pandemic, Irish deposit growth was amongst the highest. In 2020, the Irish household savings rate reached a 25% growth in real disposable income per capita in 2020, a record-high increase across the euro area and double the average rate of the previous three years. A significant amount of these savings ended up in deposits held with banks and credit unions.

The European Central Bank (ECB) has increased mortgage interest rates nine times since July 2022. The rate is now 4.25 percent compared to zero before the increases began. Irish banks have passed on most but not all of these increases to borrowers but there have been minimal changes to savings rates.

With much recent commentary on the lack of value in current bank deposit rates and increased lending rates not being passed on to savers, it is paramount that consumers are correctly informed about their options for savings and investments and the basics around good financial planning. Firstly, there are other options for short-term savings. Over the last number of years there has been an increase in the number of attractive deposit rate offerings by insurers, with rates of up to 4% compared to the measly rates available through banks, with instant access rates at a maximum of 1%, and regular savings accounts yielding 2% at most.

Brokers have a vital role in ensuring that customers understand the impact of inflation on these savings. Recent research carried out by Brokers Ireland shows that 77% of those using an advisor are aware their savings would have less buying power if inflation is higher than their savings rate, compared to 68% of those who were not advised.

In other countries, governments are acting on these issues, on the 7th of August the Italian government announced a one-off 40% windfall tax on local banks causing bank shares in some cases to drop by 8.67%. This decision, which was later watered down to a cap of 0.1% of banks’ total assets, was taken because the Italian government felt that banks were reaping extra profits from rising ECB interest rates. They also indicated that they plan to use the proceeds of the tax to support mortgage holders and cut taxes. This followed a similar move by the Spanish Government last December to introduce a tax on banks and large energy companies.

Recently our own Minister for Finance said his recommendation to Government will be that the banking levy due to expire at the end of this year be extended to the end of 2024.

With talks of windfall taxes and the main banks due to appear before an Oireachtas committee on the subject of interest rates and the banking levy, it will be interesting to see if the pressure yields result in terms of better interest rates for deposit holders.

Whether deposit rates increase or not, the concern for consumers who have all their savings on deposit and their capital being eroded by inflation is real. There is a great opportunity here for Brokers to engage with consumers and help them understand the basic principles around savings and investments.

Brokers Ireland through our Financial Broker programme has developed podcasts to assist with informing consumers about basic financial concepts, and we have one especially focused on ‘Managing your savings’ (Podcast 4) which you may wish to use to help your clients.

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