The spectre of negative interest rates is set to become a reality for an increasing number of savers in Ireland over the coming years.
Long gone are the days of banks paying you interest for keeping your savings with them.
In fact, the interest rate on almost all deposit accounts in Ireland is now close to zero and the prospect of the once unthinkable, negative rates, is becoming a reality.
Until now, negative rates have mainly affected business and corporate accounts but this is slowly beginning to change with more and more banks levying charges on those who have savings on deposit with them.
What are negative interest rates?
A negative interest rate is a charge for keeping your money on deposit with a bank. So instead of being paid money or interest, you are charged money instead.
So let’s say you have €100,000 on deposit with a bank. If it is charging a negative rate of -0.5%, €500 would be deducted from your savings, bringing your balance down to €99,500. Next year €497.50 would be deducted, reducing your balance further to €99,002.50 and so on.
Why are negative rates being imposed?
In order to stimulate economic growth the European Central Bank (ECB) has slashed interest rates over the past few years.
One of the interest rates that it has slashed is the so-called overnight deposit rate.
Most banks within the eurozone deposit surplus cash that they have with the ECB. This money is used to earn interest for banks and the overnight deposit rate has been as high as 3.75% in the past. However the rate has been reduced to -0.5%. So Irish banks are now being charged for keeping money on deposit with the ECB and they are now slowly beginning to pass that charge onto customers.
The theory is that by charging banks for holding money with the ECB, it’ll encourage banks to lend that money out instead, thereby boosting economic growth and helping to lift inflation, which until recently has been below the ECB’s target of close to 2% for years.
However it’s had limited success.
Some argue that there’s a capacity to how much debt people are willing to take on. Yes - banks are awash with money to lend, but people don’t want to borrow it and are preferring to pay down their debt or save for a rainy day instead.
What’s more, as negative ECB rates are costing banks money, they’re recouping that money elsewhere through higher current account fees and charges, and of course negative interest rates.
So a policy that is supposed to make the economy grow and ultimately make people richer is actually just costing many people money instead.
Which banks are charging negative rates?
Not all banks have started imposing negative rates, although all have slashed the returns on offer to savers.
AIB currently charges a negative rate of -0.5% on personal accounts with more than €1 million in savings.
At present customers of AIB have a whopping €80 billion or so on deposit with the bank and AIB says around €16 billion of this is currently subject to negative rates.
It’s clear from the figures that AIB’s negative rates aren’t something the average saver will have to worry about. Mind you, if you have €1 million lying around on deposit you probably have little to be worried about either!
However the trend is the key here and it remains to be seen how much further AIB lowers its threshold in the months ahead.
Bank of Ireland
In September 2020, Bank of Ireland started charging pension funds a negative interest rate of -0.65% for holding cash.
Most pension funds invest in things like stocks, bonds and commodities like gold but for liquidity reasons and risk management many also place a small amount of money in deposit accounts. So this means many people’s pension savings are being hit.
Bank of Ireland also currently charges negative interest rates on deposit accounts with over €1 million having reduced the limit from its original €2.5 million.
Like AIB, this means the vast majority of its customers won’t be impacted. However, as mentioned above, your pension fund may be hit instead.
According to the bank’s annual results for 2020, income from negative rates was €33 million in 2020, up by 73% from €19 million in 2019.
Credit Unions ultimately deposit any member's savings with the major banks.
So they have all been hit hard by the reduction in interest rates in recent years.
Most have now placed a cap on members’ savings, starting as low as €10,000 with some branches.
The EBS isn’t applying negative rates for now; however it has placed a cap of €500,000 on the amount that any one person can have in savings with the bank.
Although the cap is high, the expectation is that it will be gradually reduced over time, with other banks likely to introduce a cap also.
The German online bank claims to have almost 200,000 customers in Ireland.
Last October it announced that it would start imposing a negative rate of -0.5% on new customer deposits in excess of €50,000.
So for now interest is only charged on the balance above €50,000, not the full savings amount.
From 1st December 2021 PTSB will begin to apply negative rates to a small group of large, corporate customers, including credit unions.
However for now the bank says it has no plans to introduce negative interest rates for over 99% of customers such as personal customers, small and medium businesses and charities.
Revolut doesn’t impose negative rates at present either.
However it also doesn’t pay interest on any savings at all and never has.
Alternative savings options
Recent figures from the Central Bank show that Irish households now have a record €135 billion on deposit with banks and credit unions in Ireland.
If you’re someone who has excess money on deposit then looking into some alternative savings options is worthwhile.
Whether that's investing in the stock market, cryptocurrency, a home retrofit or topping up your pension, there are lots of better places to put your money to use instead of a deposit account.
Check out this article on alternative savings options for your money or have a listen to our recent bonkers.ie podcast episode on alternative savings options, where we take a look at what other options are out there for your hard-earned cash.
If you’d rather go down a more traditional savings route, you can compare interest rates and account features from Ireland’s main providers with our easy-to-use savings account comparison service.
Up until recently the feeling was that interest rates would stay low, or even in negative territory, for several years to come.
But Covid has created a lot of supply chain bottlenecks worldwide that have put huge upward pressure on prices. And it remains to be seen how the ECB will react to this.
If it feels that the current inflation spike is a temporary blimp, rates are still unlikely to change much for a while yet.
However if inflation become more entrenched it may feel it has to act and increase rates – which would obviously reduce the more widespread application of negative rates on savings accounts.
Whatever happens though, Irish savers probably can't expect much of a reprieve over the coming years as any rate increases are still likely to be small – and may not even be passed on to savers in the first place.
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What do you make of negative interest rates? Would you consider an alternative savings option?