Real returns on cash deposits increased last month as consumer prices continued to fall in Ireland, increasing the spread between interest rates and inflation. The consumer price index fell to a two-year low of 0.8 per cent in November – a 0.4 percentage point drop from the month before – meaning deposits earned more in real terms during the month as the value of money eroded at a slower pace.

The best deposit rates in the market at the moment are 3.5 per cent for monthly saver accounts at Ulster Bank and Permanent TSB, which offer a 1.8 per cent annualised real return after taxes at current rates of inflation. An Post offers a 3.93 per cent tax-free rate for 10-year deposits.

The continued fall in inflation, which has been going on for four months, gives the banks scope to continue cutting deposit rates in an effort to boost margins. The banks, led by Bank of Ireland and AIB, have been reducing what they pay savers while increasing rates on loans to boost interest income – a policy that has been going on irrespective of consumer prices.
“Inflation won’t come into it for the banks,” said John Finn, managing director of Treasury Solutions. “The rush to boost profitability in 2013 will drive lending margins up and deposit rates down. Full stop.”
Real returns on savings suffered a blow in the 2013 budget when Minister for Finance Michael Noonan increased deposit interest retention tax from 30 per cent to 33 per cent and said PRSI of 4 per cent would apply from 2014. Savers and investors are struggling to find yield as governments and central banks drive down rates. The European Central Bank, Federal Reserve, Bank of England and Bank of Japan all have rates at all-time lows.

Source: Sunday Business Post 16^th December