Window dressing bank offerings of 3% an attempt to save face

Fast forward to now, more than a year since its initial rate hike, nobody has benefitted more from the ECB’s decision-making than the banks.

As part of its campaign, the ECB increased its deposit rate from -0.5% to 0%. Eight more hikes later, that rate currently stands at 3.75%.

Nowadays, banks are no longer penalised for saving money. Negative rates meant banks would lose money on their savings, thus acting as an incentive to issue as many loans as possible, which they could earn interest on.

However, banks are now encouraged to save more than ever with the ECB’s deposit rate reaching a 23-year high, implemented on the assumption that increased rates would also be passed onto consumers to further minimise the supply of money.

At the same time, the ECB also began raising its lending rate, making it increasingly expensive for banks to borrow money.

Hence, the likes of AIB, Bank of Ireland and Permanent TSB were faced with a double-edged sword — while they could cash in on the money they saved with returns now at 3.75%, borrowing money and thus, issuing loans became increasingly expensive.

Only one of these interest rate increases was passed onto consumers, can you guess which one?

In the last 12 months, persistent rate hikes across Ireland’s two-and-a-half banks have seen mortgage rates nearly double, with latest figures from the Central Statistics Office reporting a 49.5% annual hike in interest repayments, outpacing both electricity and gas prices.

At the same time, Ireland was also recently found by Standard & Poor to have the worst transmission of deposit rates to consumers out of the entire eurozone, US and UK, with Irish savers receiving just 7% of ECB rate increases.

Some analysts have pointed out that Irish banks have been slower to pass on mortgage rates than their European counterparts, with many arguing that mortgage-holder benefits have come largely at the expense of savers.

While that may have once been the case, rising mortgage rates are not so slow anymore, and have since exceeded the eurozone average by 0.25%, adding further to the riches of Ireland’s legacy banks.

In July, AIB reported in its half-year earnings a net interest income — the difference between what the bank pays for loans it receives and what it charges on loans it issues — of more than €1.77bn, up a staggering 98% on the same period last year.

Benefitting from a “higher interest rate environment” and “higher average customer loan volumes,” AIB also posted a net interest margin of 2.94%, up 146 basis points on the same period in 2022.

In a similar vein, Bank of Ireland posted a net interest income exceeding €1.8bn in the first six months of 2023 — up 68% year-on-year — with the second half of 2023 expected to produce an even higher net interest income than before.

Questions to answer

It is not a secret — Ireland’s banks are directly profiting from their refusal to pass on interest rate hikes to savers, the same hikes implemented to combat high inflation which, as the ECB noted, “is a major challenge for all of us.”

Following their bumper profits, AIB, Bank of Ireland, and Permanent TSB have faced extensive grilling from the Government for not passing rising deposit rates onto customers, with Minister Simon Harris last week calling the rates on offer “offensive,” adding that savers have not reaped any benefits of rising interest.

Later this month, the pillar banks and their representative body will appear before the Oireachtas Finance Committee to answer questions on their interest rate policy, where they will come under additional pressure to up their offerings.

Earlier this week, Bank of Ireland became the first bank to react to sustained criticism, introducing a “market-leading,” 3% for savers, which will apply to just one product, for a 12-month period, after which a rate of 2% will apply. Permanent TSB quickly followed suit, also introducing a 3% rate on just one specific product, for a limited time — that being its 3-year fixed-term deposit.

AIB was the final bank to respond, introducing a 3% return for Online Savers on amounts between €10 to €1,000 per month for 12 months. Unlike the other two, AIB has offered 3% on more than just one product, also raising interest on its 2-year term deposit, junior, and student saver rates to 3%.

To put it into context, 3% is still low compared with other eurozone countries where rates in excess of 3.75% are readily available across France, Portugal, and Italy, especially when the variety of Irish products actually offering that rate is considered.

In addition, the latest figures from the Central Bank of Ireland show an almost 0.6% gap between Irish interest rates on new fixed-term household deposits and the equivalent rate in the euro area, with this week’s changes pretty unlikely to bridge the gap any further.

Hence, after being dragged to the table by the Government, Ireland’s banks have responded with mere window-dressing, pushing a “market-leading,” rate that, when analysed, only further prompts questions of who Ireland’s banks really serve.