INFLATION & INTEREST RATES

Although Irish institutions now have to pay the best deposit rates in Europe just to maintain funds here, they are still falling behind soaring inflation.

The Sunday Business Post notes the rebound in inflation means the seemingly attractive interest rates being offered currently on deposit accounts are not high enough to beat inflation after deposit interest rate tax (Dirt) is taken into account.

The Consumer Price Index hit 3.2% in the year to April, meaning banks would have to offer deposit rates of almost 4.5% just to keep pace. The best on offer at present is around 4% but even rates of this magnitude may not be around for much longer, despite the banks’ desperation to attract deposits to wean them off Central Bank support, which is costing them a small fortune every year.

The Bank of Ireland warned last month the so-called ‘deposit war’ was damaging its chance of returning to profitability. Pat McCormack, the head of wealth management at Barclays Wealth in Dublin, told The Sunday Times: “It’s not sustainable for banks to pay deposit rates that are two to three percentage points greater than the base rate of interest.”