Is it time for the Government to help out savers?
State borrows from abroad, but why not tap retail savings market?
Is the Irish savings model broken? Photograph: Ivan Bliznetsov/iStock/Getty
Has there ever been a worse time to be a saver? Credit unions don’t want your money; pan-European savings platforms such as Raisin, which has rates of as much as 1.27 per cent a year (over five years), remain closed to Irish savers; foreign savings specialists such as Leeds Building Society and Rabodirect have exited the market; while the rates being offered by the banks are derisory, ranging from zero to just 0.5 per cent.
But what has protected savers – at least until recently – has been Ireland’s low inflation environment. For example, if you had invested in the National Treasury Management Agency (NTMA)’s 10-year solidarity bond when it launched back in April 2010, your savings would have substantially out-paced inflation, as your return over 10 years would have been 4.14 per cent AER (or 3.96 per cent, as Dirt was liable on the original bond).
So, on an investment of €10,000 then, you could expect to cash in about €15,057.65 next April. At the same time, inflation, as measured by the Consumer Price Index, rose by only 7.3 per cent over the same period to May 2019.
This means that the basket of goods and services you could have bought with your €10,000 in April 2010 would have, when adjusted for inflation, cost you just €10,734 in May of this year.
So, you will be well up.
However, since then, there have been two changes; firstly, while inflation remains muted, it is on the rise again, and secondly, banks have slashed their deposit offerings almost to zero. Remember, any time your savings don’t grow at the same rate as inflation, you are losing money.
So consider our saver today earning just 0.01 per cent of a return on their €10,000. Next year, their money would be worth just €10,010, or €10,050 if they were earning 0.5 per cent; but with inflation running at an annual rate of 1 per cent in May (and it was as high as 1.7 per cent in April) the buying power of their €10,000 will have been eroded by 1 per cent.
This means they will now need €10,100 to buy the same goods as they could have done this time last year – but what they’re earning on their deposits is no longer enough to cover this. So the real value of our saver’s money is falling.
Not only that, but official inflation statistics don’t always reflect the particular pressures households can be under, which means that the differential may be even larger.
Now, to make matters even worse, at the same time as inflation in Ireland is picking up, the European Central Bank (ECB) is contemplating a rate reduction, with our own Philip Lane, now chief economist with the ECB, recently arguing that the ECB has scope to cut rates further.
Such a move would surely have a knock-on impact on savers here, sending rates lower again. While Irish rates – for both mortgages and deposits – have long ago disconnected from the trajectory of European rates, it’s hard to imagine that banks nonetheless wouldn’t pass on a cut in the ECB rate to savers. After all, they’re already charging corporates to hold their money.
So what can be done? Well, what about the Government ramping up its offerings to retail investors? After all, it seems that it could do with more domestic support. Indeed on Monday, the NTMA noted that a key risk for Ireland’s funding going forward was its dependence on foreign investors. They account for about 90 per cent of our funding – significantly more than other countries.
While attracting Irish retail investors to invest in government bonds is one approach – and remember the State paid an average of about 1 per cent to borrow last year, an attractive sum for a beleaguered saver – another approach is for the Government to offer them some relief through an enhanced State savings package.
At the moment for example, the best rate for a lump-sum is the solidarity bond, offering 1.5 per cent AER – but over 10 years. The shortest term is a three-year savings bond, which offers just 0.33 per cent AER.
Now compare this what you can get in France. Through a livret d’épargne populaire, a government-backed savings option, low to medium income households can earn up to 1.25 per cent a year on their savings (tax free) while deposits of up to €22,950 are also guaranteed an annual rate of 0.75 per cent until February 2020 through a similar product. Given a similar interest rate environment to here, the French Government is obviously incentivising savers.
So why not here?
The State cannot afford to give savers too much of a dig-out; as the NTMA chief executive Conor O’Kelly warned on Tuesday, the scale of the country’s debt burden puts us at risk of a sharp increase in repayment costs should interest rates start to rise again, so cutting debt is a priority.
But another issue – raising the ire of the banks – shouldn’t be a concern. Back in 2013 you might recall, the NTMA cut its rates after banks complained that they couldn’t compete with the Dirt-free State savings product. But this time around competition is badly needed; and given the dearth of international players looking to set up shop to offer a deposit product in Ireland, the Government may well be savers’ only hope.
The question is whether or not it has the appetite to do so.