Why inflation-hit Ireland is no country for savers

Close-up view of unrecognizable man counting money. Horizontal composition. Studio shot. Image developed from RAW format.

Earlier this week, the Competition and Consumer Protection Commission (CCPC) published details of a consumer research trial, which looked at the ways in which banks might encourage us to save for a rainy day.

The CPCC says that the research was carried out because it is thought that we need to be encouraged to save more “to increase financial resilience against unexpected financial shocks”.

The project featured a behavioural research trial, carried out by the ESRI’s Behavioural Research Unit and Bank of Ireland (BOI). As part of this trial, customers were sent marketing emails with “consumer-friendly infographics” that illustrated financial shock statistics.

For example, one of these said: “Six in 10 people face an unexpected expense each year.”

Customers who received these emails were 20% more likely to open a savings account than those who received standard marketing materials. The study’s financial shock emails and digital ads saw a click-through rate increase of almost 10%.

Jeremy Godfrey is chairman of the CCPC. He points out that every year, most people face at least one unexpected financial shock, such as spending money on car repairs, or boiler repairs.

“Building up savings as a buffer against the unexpected is important for financial wellbeing, but many people who could save for the unexpected don’t do so,” he says. “This ground-breaking research conducted by the ESRI, Bank of Ireland, and the CCPC has shown that many more customers will choose to save for the unexpected if financial institutions use behavioural insights to design their marketing materials and their application process. We encourage other financial institutions to make use of this research so that more Irish consumers can weather financial shocks without going into debt.”

While there’s no doubt that a rainy day fund is a good idea, it’s been a long time since the current interest rate/inflation rate combination has been so aggressively anti-saver.

Inflation is at a 22-year high of 6.7%. If you have €1,000 to put away for 10 years, the best interest rate you can hope for is the 0.98% AER you’ll get from a 10 Year National Solidarity Bond. All other interest rates in the market are significantly lower.

The reality of this situation is that real interest rates – that is interest rates adjusted for inflation – are in negative territory. In a high-inflation/low-interest rate world, the money you put in the bank for any length of time declines in value.

In the past, monetary authorities have tended to increase interest rates during periods of high inflation, but that’s not happening at the moment. And despite the fact that inflation is hitting record highs around the EU, the ECB isn’t even talking about rate hikes yet. Some commentators expect rate rises later this year, but no one is predicting anything dramatic.

Why? Because much of the inflationary spiral is as a result of fuel prices, and underlying economic trends are still weak. The risk is that a significant rise in interest rates could choke off any fledgling recovery in the wider eurozone.

So while the ECB sits on its hands, prices will continue to rise. According to the ESRI, inflation is expected to breach 8% in the coming months. This is a big worry.

Research from Bonkers.ie last week found that there’s significant concern about increasing prices across all areas and among all age groups, while women and those aged 35-44 showed the highest level of concern.

A hefty 89% of people say they are highly concerned or worried about rising gas and electricity prices, and this rises to 95% among the 35-44 age group. Some 81% of people are highly concerned about rising petrol and diesel prices. This increases to 84% among women, and 85% among the 35-44 age group.

Food prices are also a big worry. Some 72% of men and 77% of women are highly concerned about increasing food costs. This rises to 81% among the 35-44 age group. Only 2% said they weren’t worried at all.

Daragh Cassidy of Bonkers.ie says that after almost a decade of negligible price growth, inflation has come back with a bang. Prices have risen by almost the same amount over the past year than they did in the previous decade.

“Understandably, rising energy prices are what concern people the most,” he says. “Since the autumn of 2020, the average electricity bill has shot up by around €800 a year and the average gas bill has gone up by around €600.”

“Looking forward, there is no immediate end in sight to rising prices. Energy prices, which are highly volatile, will largely determine whether inflation will return to more normal levels over the coming months, as will the trajectory of the war in Ukraine.”

Against the backdrop of rising prices, the fact that interest rates are not going up – at least not significantly – is going to be welcome news for borrowers. Savers, however, don’t have much to look forward to.

Those who wish to put away a regular amount to deal with unexpected expenses are particularly poorly served.

According to the CCPC’s regular savings account calculator, if you want to save €100 each month, the best rate you’ll get is 0.25% AER. This is available from the BOI’s Goalsaver account and from their Childsaver account. The amount you can save at that rate is capped at €14,999 in the case of the Goalsaver account and €10,000 in the case of the Childsaver account.

If you stick with the programme and put away that €100 per year, the interest earned at the end of the first year will come to the princely sum of €1.63.

For completeness, here are the other options for the regular saver in the Irish market. Permanent TSB offers 0.20% on amounts up to €50,000. AIB will offer 0.10% on its savings accounts while KBC’s Regular Saver Account offers a rate of 0.05% – that’s one-20th of 1%.

Raisin Bank is another option. This is part of Raisin DS, a fintech company that provides an open banking infrastructure for the global deposit market, opening up investment opportunities for consumers in Europe and the US through access to savings products and some of the best interest rates. Essentially, it gives you access to deposit rates across the EU. That’s the good news. The bad news is that while the rates it offers are better, they’re not inflation-beating better. Dependent on a few T&Cs, you can access rates of up to 1.23% AER.