"Negative real returns on deposits after taxes and inflation"

[The Ghoul]

I keep hearing and reading this in the media, on websites and in conversations with people.

Is this actually true?

From the CSO, the latest CPI figure (year to October 2013) is +0.1%. The HICP for the same period is -0.1%. The figures for the years to August and September were also very low. In the year to June 2013 both CPI and HICP were higher but still quite low at +0.7%
http://www.cso.ie/en/releasesandpublications/er/cpi/consumerpriceindexoctober2013/#.UpM7dclFDcs

Examples of current interest rates from the best buys on AAM:
PTSB 1 year fixed term deposit currently 2.45% fixed minus 45% tax
KBC instant access account currently 2.3% variable minus 45% tax

During the boom interest rates were a lot higher, DIRT was a lot lower but the CPI was sometimes at +5%. What were the real returns on bank deposits then?

No doubt some people will be cynical about the accuracy of the CSO figures in terms of representing "actual inflation". However, one could also be cynical about those in the financial sector trying to steer people away from deposits and towards investments which coincidentally involve payment of fees, commissions etc. One could also be cynical about those in the business community trying to discourage saving and encourage spending.

 

[Brendan Burgess]

Hi Ghoul

Not sure if anyone has done a good formal study of the issue.

But there is a real risk that the returns will not keep pace with inflation.

There is also a small risk of hyperinflation appearing suddenly and wiping out deposits.

Brendan

 

[Marc]

This is a very important point - we need to distinguish between the current real rate of return and the expected real rate.

The average rate of inflation over the very long term has tended to average around 3%. However, the current rate of inflation as "The Ghoul" correctly notes is close to zero.

We know that over long periods of time in the USA, UK and other countries where we have good data that the gross return on deposits (or proxies for deposits such as 3 month money market rates) have tended to offer a real rate of return of around 0% to 1%pa before taxes.

Logically therefore if, all else being equal, taxes go up, the expected return on cash deposits has to go down relative to the average over time since the after tax return is expected to be lower.