Negative interest rates for savers in Ireland

Monetary policy is how central banks control interest rates. Central banks operate in almost every economy in the world, controlling the cash supply for their respective economies. The EU has an overarching central bank, which is called the European Central Bank. A central bank’s primary purpose is to control inflation rather than the economy as a whole. 

Keeping inflation at the optimum level of around 2% is a tricky balancing act. If everyone pumps their money into the economy and takes out loans and credit cards, inflation can rise too high, resulting in central banks increasing interest rates to control it. 

If they increase interest rates too much, however, and nobody wants to spend or borrow because they are so high, inflation drops too low. 

As a result, central banks might decide to drop their interest rates and encourage people to spend again – sometimes resulting in negative interest rates. 

The ECB sets three main interest rates:

1. A refinancing rate, which allows banks to borrow weekly from the Eurosystem at a set rate
2. A deposit facility rate, which is for overnight deposits within the Eurosystem and is less that the refinancing rate
3. A marginal lending facility rate on overnight credit at a better rate than the refinancing rate

While it’s commonly thought that negative interest rates are a relatively new concept, they’ve actually been around for quite some time. Negative interest rates were used as a tool to kickstart the economy immediately after World Wars I and II, the latter at a time when the causes of the Great Depression were still being explored. 

As you can see from the chart below, low and negative interest rates were used in both the UK and the US after World War II to pay off war debts. These interest rates, coupled with increased pressure to purchase government bonds, was used as a model for financial recovery.

Negative interest rates are an unconventional way of trying to stimulate economic growth by making it cheaper to borrow and therefore boosting spending and investment. If successful, negative rates could help prevent a global recession while easing the burden of debt that many economies are under.

In theory, negative interest rates mean that consumers – both individuals and businesses – won’t earn as much interest on their savings as they once would, or the value of your savings will decrease. However, some banks have helped to ease this burden. In countries with negative interest rates, although banks may pass their costs on to savers who hold deposits with them, to date, few banks have done so.

There’s a common argument as to how negative interest rates affect lenders specifically. During times of high interest rates, cash flow usually increases, as shown in the chart below. This is because consumers take advantage of better returns, knowing they’ll earn more interest. Therefore, a counter argument against using negative interest rates to boost the economy is that they could have the opposite effect.

Negative interest rates are arguably seen as a tool against unprecedented economic turmoil, used to boost the economy and create a surge of borrowing by facilitating low rates on lending. The theoretical aim of negative interest rates is to benefit everyone by improving the economy.

Although the base interest rate in Ireland is not currently negative, it has been on a downward trend over the last few years and is currently 0%. Interest rates on certain savings accounts are low, so you may be wondering where to look for competitive interest rates.

You can guarantee a risk-free return on your deposit by opening savings accounts with a fixed interest rate, such as term deposit accounts. If you have a lump sum you’d like to invest and can afford to lock your money in for a set time, you’re more likely to earn a competitive interest rate. 

At Raisin, we have partnered with banks offering deposit-protected savings accounts that beat interest rates’ downward trend.