THE European Central Bank is likely to cut interest rates by 0.25 per cent at its meeting at 11am today.
The expected drop in rates to 0.5 per cent come after weak German economic figures indicate that Europe’s economy is spluttering badly.
While mortgage holders in Ireland will look on any fall in rates as a welcome relief, the drop will hit savers hard. Latest central bank figures show that over €92.5bn in cash from Irish households was on deposit with the banks in March. The vast majority of this – some €47bn – was on deposit overnight. Short term and demand savings accounts generally pay far less in interest.
Most recent figures from the Central Statistics Office show that Ireland’s rate of inflation has fallen to 0.5 per cent – the lowest annualised rate since September 2010. Again, this is positive news for consumers as prices are not rising fast. However, savers will be clobbered. Any savings account that pays 0.5 per cent in interest or less is now toxic. Inflation will eat away at the value of the cash lodged in one of these accounts.
Price comparison site Bonkers.ie lists 11 savings accounts that pay 0.5 per cent or less in interest. These include demand or instant access accounts at Bank of Ireland, AIB, Ulster Bank and Permanent TSB. Some of these accounts pay a rate of as low as 0.1 per cent. This means that if you lodge €10,000 for a year – you’ll only get €10 in interest.
The proposed cut in rates will swell the number of “loss making” savings accounts considerably as banks will slash savings rates offered. Rabobank has the highest interest rate for savings at 2.9 per cent, according to Bonkers.ie. But you have to give the bank your money for ten years. KBC’s instant access demand account has dropped its rate substantially but still pays 2.6 per cent. The days of savings accounts paying 5 per cent plus are long gone.