A preference among Irish households for “shorter-term, more accessible deposit accounts” cost them almost €800 million in unearned interest during 2024, The Central Bank of Ireland has estimated.
Despite recent interest rate hikes on longer term savings accounts, Irish households lag behind the euro area average for the use of these higher yield accounts according to a study by Central Bank economist Tiernan Heffernan.
It found that a very high proportion keep their deposits in current and other easy-to-access accounts which offer low interest rates.
In recent years, close to 90 per cent of deposits were in these ‘overnight’ accounts, the study found, which compares to about 55 per cent across the broader euro area.
Mr Heffernan said there was “little incentive to hold longer-term deposits” historically due to the lack of difference between overnight and term deposit interest rates.
Consumer behaviour changed slightly following a series of interest rate hikes by the European Central Bank (ECB) in mid-2022 which brought their deposit facility rates from -0.5 per cent to 4 per cent in less than 18-months.
The transition to higher-yield, longer-term accounts in Ireland has been slow, however, with Irish households still holding 86 per cent of their money in overnight deposit accounts, compared with the euro area average of 54 per cent.
By comparing the overall savings volumes at different interest rates, Mr Heffernan estimated that in 2024 Irish households earned interest of approximately €532 million.
However, had they placed their savings in higher-yield accounts at the same rate as the EU average, the interest earned “would be significantly higher”.
“In this situation Irish households would have earned €1,320 million in bank deposit interest in 2024, or €788 million more than the actual estimate,” he said, noting that his figure could have risen by an additional €444 million during the same period had Irish banks offered the average euro area bank interest rates.
Responding to the study, Rachel McGovern, deputy chief executive of Brokers Ireland, called on the Government to implement the findings of the Funds Sector Review which identified a need to reduce taxes on life assurance savings and investment policies.
“The figures in today’s study are stark. Delaying giving effect to the Funds Review recommendations, which are in line with the objectives of the EU Savings and Investment Union, contributes to bad outcomes for consumers,” she said.
The Funds Review, produced by Department of Finance officials, recommended that the taxation on investments in funds be aligned with the lower, 33 per cent capital gains tax rate that applies to direct investments from stocks to property.
Under current rules, domestic investors in funds must pay a 41 per cent tax on the sale of a fund, irrespective of what income tax bracket they are in, or after eight years – which ever comes first.
