Getting the best return on your cash deposits

With banks slow to raise interest rates for on-demand deposit account holders, it makes sense to look for alternatives, says Martin Glennon, Head of Financial Planning.

Since July 2022, the European Central Bank has raised interest rates ten times in an effort to control inflation. While higher interest rates should be good news for individuals with cash savings, Irish retail banks have been slow to raise rates for their deposit account holders. Most on-demand accounts still earn less than 1% interest per annum, which, in an inflationary environment, erodes the real value of cash for savers.

For an individual with €50,000 held on deposit, an interest rate of 0.5% per annum means that the ‘real’ value of their deposit will be just €43,500 after three years, assuming inflation remains at the current 5% level (September 2023). In other words, they will see their cash lose around €6,500 of value and buying power.

While inflation has eased in the last few weeks, it is still expected to stay “too high for too long” according to the European Central Bank and, although at their recent meeting on 26 October 2023, the ECB’s Governing Council decided to keep the three main interest rates unchanged, there is still a possibility of further rate increases depending on the inflation outlook.

In this scenario, it makes sense for consumers with cash on deposit to shop around for higher returns—for example, currently, there are offerings that pay out over 3% per annum where deposits are held for a three-year or five-year term. These offerings are available for both company and personal funds.

Risk is an important consideration when deciding what to do with your cash. As always, before making any decision, it’s important to do your homework and obtain professional advice if necessary. Your local ifac office can point you in the right direction.