Most people earn at least some interest on their savings, but imagine if you had to actually pay for the privilege of keeping your money on deposit at the bank?
Sweden’s Central Bank just cut one of their interest rates to minus 0.5% today. It means that if a Swedish bank wants to polp money on deposit with their Central Bank, they have to pay to do it.
It’s the same with the European Central Bank – they recently cut the interest rate they “offer” to Eurozone banks to minus 0.30%. So if an Irish bank wants to put your money on deposit with the ECB, they have to pay to do it too.
Lend and spend
With rate cuts like these, Central Banks across Europe are basically jumping up and down trying to get the regular banks to lend money to you, me and the shop down the street. And they want punters like us to get out there and blow all our savings too.
In an Irish context, it just isn’t working though. Irish people are serious savers, and saving money is a habit we’ve grimly maintained despite the banking crisis, the housing collapse and the worst recession in the history of the state.
By themselves, any one of these economic shocks could lead to a huge reduction in the money people keep on deposit, and all three together are fully capable of starting a run on the banks in a normal country… but not here in Ireland.
Over the last seven years, we’ve weathered unemployment, falling incomes, increased taxes and a property value collapse – and we’ve still managed to maintain a huge amount of money in the very banks that gave us many of our recent problems.
So how much money do we have?
Well, we currently keep €57,000 on deposit for every household in the state.
That translates to a staggering €20,400 on deposit in Irish banks for every man, woman and child in the country.
And if you just look at people aged 25 and older, there is around €31,000 for every adult man and adult woman in Ireland, a staggering amount given the trauma of the last few years.
Certainly, we keep an awful lot of money in cash deposits, but what’s really interesting is that we seem to have defied the European Central Bank, our own government and even accepted economic theory.
Why? Well it’s because we haven’t just maintained our savings over the last few years, we’ve actually routinely increased them and we’re now approaching the highest level of deposits held with Irish banks since January 2011 at a staggering €94,741 billion – and that’s just private households.
In fact, since 2009, the amount Irish private households keep on deposit has never gone below €90 billion.
DIRT and defying government policy
When the crash hit, cash was urgently needed to stimulate the economy, and the government was well aware of just how much money was sitting in the deposit accounts of Irish citizens.
So the government decided to try and loosen up some of that cash. And it tried and tried again. Every year from 2008 to 2014 Deposit Interest Retention Tax (DIRT) was increased. This wasn’t just done as a revenue generating exercise, it was done to encourage people to take money out and spend it. And so in the years since the crash, the DIRT rate was steadily increased from 20% right up to 41%.
But the government didn’t stop there. For many people PRSI has to be paid on savings interest now too, which effectively brought the DIRT rate up to 45%.
It didn’t work though - Irish people held on to their deposits and just kept on saving.
Defying the European Central Bank
The European Central Bank didn’t stand idly by either. They wanted people to spend Europe out of the recession too, so they set about loosening up some money by lowering their interest rates.
In 2008, the ECB rate that they lend money to banks at was 3.75%. In the following six years, the ECB cut that rate fifteen times and it now stands a fraction off zero at just 0.05%. The lowest it’s ever been.
So now, if banks wants to borrow money from the ECB they'll pay almost nothing for it, and if banks want to put money on deposit with the ECB they'll have to pay to do it!
Savings returns have fallen by 74%
Unsurprisingly, the knock-on effect of these rock-bottom ECB rates is that the savings interest rates paid by our banks have fallen off a cliff too.
For lump sum depositors, the best interest rates on benchmark 1 year term deposit accounts have collapsed from 3.5% in 2010 to just 1.15% in 2016.
But that’s only half the story. With such low interest rates coupled with a much higher DIRT rate, savers are earning 74% less on their savings than they were just six years ago. And now with inflation on the rise (currently 0.10%) savers face a real risk of actually losing money by maintaining their cash in deposit accounts.
In fact, people with demand deposit accounts are actually losing money with rates as low as 0.01% from Ireland’s largest banks.
The drop in interest rates and the increase in DIRT has affected savings returns so dramatically that now a household with €10,000 on deposit in the best 1 year term account available will earn just €67.85 after one year.
Back in 2010, the same household with the same €10,000 would have earned a fairly reasonable €265.50.
Irish households continue to save
Despite everything that has happened, the Irish savings habit has proven to be as solid as the Rock of Cashel. It has defied Department of Finance and a government policy that has specifically targeted savings by increasing DIRT and reducing savings returns.
The Irish savings habit has even defied the ECB and has continued despite record low interest rates.
And sadly, the Irish savings habit has not been rewarded by Irish banks which have all reduced interest rates to a point where it is now difficult to realise any meaningful return on savings.
So what should savers do?
Irish savers have proven to be a resilient lot in the face of adversity, but sadly there are now few real incentives left for savers.
The thing is - saving is as important as it ever was, and the most important reasons for saving remains the same too. Saving for education, saving for security and saving to purchase a home.
And it’s prospective home buyers that have been hit particularly hard in the last year, with rising prices and new Central Bank rules that came into effect in February 2015 effectively doubling deposit requirements for many home buyers.
In fact, the new Central Bank mortgage deposit rules coupled with rising house prices are forcing many people to save more that they would otherwise. This is borne out by the fact that money in household deposits increased by nearly €3 billion in 2015 alone. This is a huge jump when compared to 2014 when there was almost no change in household deposits.
So savers must continue to save, and even though returns are poor, customers should still try to maximise their returns. It is only through moving money and taking advantage of the best accounts and the best rates available that will make banks take notice and start to compete in a meaningful way.
Final thought: Here's a scary notion for savers, and one for the Department of Finance to ponder... What would happen if we hit zero savings interest, or fall below zero? You can throw all the DIRT you like at us, but 41% of zero is still zero. Could we end up with a "Savings Charge" that takes a second bite out of our money after the bank has taken their cut with negative rates? Or perhaps the banks will pay the DIRT instead of us?
A few numbers that were used in the calculations for this post:
4,635,400 - Population estimate according to the CSO for April 2015
1,658,243 – number of households in Ireland according to the CSO.
€94,741,000,000 or €94.741 billion – amount of money in household deposits in Ireland according to the Central Bank of Ireland.