Bank of Ireland looks set to impose negative interest rates on a number of its corporate clients from October. What could this mean for personal banking customers?
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Irish banking may just have had its latest ‘crossing the Rubicon’ moment.
According to The Irish Times, Bank of Ireland is set to break through the significant 0.00% interest rate barrier and begin charging certain customers to keep money on deposit.
While it is believed that negative interest rates will only be imposed upon Bank of Ireland’s large corporate clients which place deposits in excess of €10million (so, about 100 in total), it is an unprecedented move for an Irish-owned bank.
Bank of Ireland's negative rates
Although Bank of Ireland’s move to cut rates to minus 0.1 per cent for certain corporate clients is both materially and symbolically significant, it is not all that surprising.
In March, the European Central Bank cut rates on its overnight deposit facility to minus 0.40 per cent, meaning that banks themselves must now pay to keep money on deposit with the ECB. If anything, it’s surprising that it has taken five months for this new cost to be passed on to customers.
In fact, Ulster Bank began imposing negative interest rates on a number of its corporate customers last year, in a move which didn’t get very much media attention.
With the ECB’s main interest rate currently standing at an historic low of 0.00 per cent and the rates being offered by Irish banks continuing to slide, personal banking customers will be wondering if they will be next in line to be charged for the privilege of keep money on deposit with their bank.
Personal savings accounts
AIB and Permanent TSB were quick to respond to the news of Bank of Ireland’s pending rate cut, with each bank announcing that they had no intention of entering negative interest territory at this time.
Ireland’s banks – Bank of Ireland included – are well aware of their still-fragile reputation and fraught relationship with the nation’s banking customers. With this in mind, they will all be very reluctant to begin charging customers to keep their hard-earned money on deposit.
So for now, consumers should keep an extra-close eye on the rates being offered by Ireland’s leading banks and consider switching if there’s a better deal to be had elsewhere. Although rates are generally very low, there are still reasonable rates to be found, if customers know where to look.
For example, KBC is offering a 3.50 per cent return on its Regular Saver Account to Extra Current Account holders, EBS will give a 3.00 per cent return under its Family Savings Account and, for lump sum savers, Bank of Ireland is offering a 1.25% AER and 9.05% gross return to customers who are willing to lock their money away for seven years.
Customers can compare and switch savings accounts here
As savings rates have been tumbling, deposit interest retention tax (DIRT) has been steadily increasing over recent years. It now stands at an all-time high of 41 per cent, meaning that if a customer earns €100 interest on his/her savings, only €59 of this will actually end up in his/her pocket. The other €41 is for the Government.
If personal savings accounts did end up in negative interest territory, it’d be interesting to see what the Government would to do about DIRT. Perhaps the tax would be inverted, meaning the Government would pay personal banking customers 41 per cent of their negative interest rate charge to help offset the cost of saving money.
Here's hoping we never have to find out.