State Savings have abandoned the small saver

[PMU]

It is, or should be the primary objective of the ECB. No doubt it is also an objective of governments but it is one of competing objectives and, therefore, not necessarily primary. A slowing economy, rising unemployment, restricted public spending and possible recession are all fellow travellers of a policy fixated on controlling inflation. In the context of an upcoming election these prospects are liable to diminish a government's appetite for the inflation fight.

This is actually an argument that Ireland should leave the eurozone if its membership is seen to hamper the achievement of other policy objectives.

When we joined the eurozone we joined a single currency union with a medium term inflation target of 2% with the interest rates required to meet this target set by the ECB. This entailed Ireland giving up a policy instrument – the ability to set its own interest rate - and also agreeing that the ECB would maintain price stability. It irrelevant whether or not the Irish government has an “ appetite for the inflation fight” They have no say so in the matter as this is now within the domain of the ECB as are the policy instruments used to maintain price stability..

As members of a single currency union, holders of euro deposits in Ireland have a legitimate expectation that these deposits will not be eroded by inflation due to interest rates at the national level not reflecting ECB policy. There are various ways the state can do this, e.g. a windfall profits tax on the difference banks earn on deposits placed on the ECB and the interest paid to deposit holders, etc., but the easiest way is simply to increase the interest rates provided by state savings to reflect the price of money in the eurozone (which it should do anyway to reflect changes in the value of the euro) and let competition force the banks to increase interest rates on deposits.

 

[Early Riser]

When we joined the eurozone we joined a single currency union with a medium term inflation target of 2% with the interest rates required to meet this target set by the ECB. This entailed Ireland giving up a policy instrument – the ability to set its own interest rate - and also agreeing that the ECB would maintain price stability. It irrelevant whether or not the Irish government has an “ appetite for the inflation fight” They have no say so in the matter as this is now within the domain of the ECB as are the policy instruments used to maintain price stability..

It is not specifically an Irish government issue or EU issue. In the US the federal Reserve is pushing up interest rates to fight inflation (with the anticipated impact on employment and the economy implied by that) while the federal government is simultaneously pushing huge spending programmes to boost the economy. There is no reason to believe an Irish government would behave any differently, even if with a central bank independent from the EU.

There are various ways the state can do this,

There are various ways the government can do this, whether in the EU or not. As per @Sarenco's posts, they are focussing on other priorities.

 

[thedaddyman]

've had €100 in prize bonds for 20 years and have won nothing. So my rate of return is 0.00% . The 0.35% is just smoke and mirrors. Prize bonds are only raffle tickets

 

[ClubMan]

've had €100 in prize bonds for 20 years and have won nothing. So my rate of return is 0.00% . The 0.35% is just smoke and mirrors.

Correct. I can never get over the fact that State Savings quote an interest rate for Prize Bonds and others parrot it when it's completely misleading/meaningless.

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Product      Period  Interest Rate  Net AER
Prize Bonds  n/a     0.35%          n/a

Prize bonds are only raffle tickets

To be fair, they're tickets for a raffle that are refundable at their nominal face value. So, better than the Lotto for example, but that's not saying much.

 

[Duke of Marmalade]

Correct. I can never get over the fact that State Savings quote an interest rate for Prize Bonds and others parrot it when it's completely misleading/meaningless.

Using my model the chances of winning anything over 10 years on €100 at current rates is about 1 in 20. If you have won, the minimum win would be €50 and the maximum would have been €1m (€250k now I think). But for sure if you can find a bank to take a €100 deposit I guess you might have made €1 in interest over the 10 years.
@ClubMan you are making the same mistake that I made until about 5 years ago. I had this basic prejudice that since it had a lotto ring to it it must be in the same rip-off country. Not at all! Forget about the lotto aspect. About .1% of the current .35% is paid out in big prizes and yes even the maximum joint holding of €500k would have only a 13% chance of winning these in any year and then only in the smaller €1,000 or €500 category, even that investment has a quite small chance of winning the super prizes.
But the eye opener for me was when I learnt that financially sophisticated folk were investing large sums in Prize Bonds. The attraction was not the lotto prizes but the €50 prizes. By the law of large numbers a big investment (>€100k) can be pretty sure, in normal times, to easily beat the pants off any term deposit over any year and they are redeemable at notice - they are in fact the deposits of choice for many HNW folk.
The current 0.35%, of which 0.25% is paid in €50 prizes, was struck in February 2021. Historically incredibly low but still beating the pants off any deposit. That is why, with the recent review, the failure to increase the Prize Bond rate is so perplexing and disappointing. I wouldn't be recommending Prize Bonds just at the moment except as presents for newly borns and grand nephews and nieces

 

[ClubMan]

Using my model the chances of winning anything over 10 years on €100 at current rates is about 1 in 20. If you have won, the minimum win would be €50 and the maximum would have been €1m (€250k now I think). But for sure if you can find a bank to take a €100 deposit I guess you might have made €1 in interest over the 10 years.
@ClubMan you are making the same mistake that I made until about 5 years ago. I had this basic prejudice that since it had a lotto ring to it it must be in the same rip-off country. Not at all! Forget about the lotto aspect. About .1% of the current .35% is paid out in big prizes and yes even the maximum joint holding of €500k would have only a 13% chance of winning these in any year and then only in the smaller €1,000 or €500 category, even that investment has a quite small chance of winning the super prizes.
But the eye opener for me was when I learnt that financially sophisticated folk were investing large sums in Prize Bonds. The attraction was not the lotto prizes but the €50 prizes. By the law of large numbers a big investment (>€100k) can be pretty sure, in normal times, to easily beat the pants off any term deposit over any year and they are redeemable at notice - they are in fact the deposits of choice for many HNW folk.
The current 0.35%, of which 0.25% is paid in €50 prizes, was struck in February 2021. Historically incredibly low but still beating the pants off any deposit. That is why, with the recent review, the failure to increase the Prize Bond rate is so perplexing and disappointing. I wouldn't be recommending Prize Bonds just at the moment except as presents for newly borns and grand nephews and nieces

Any chance of an executive summary of your point as I can't really figure it out?

 

[Duke of Marmalade]

Any chance of an executive summary of your point as I can't really figure it out?

Traditionally for sums in excess of, say, €100k the €50 prizes were so predictable statistically that Prize Bonds were nearly certain to beat the pants off deposits over a year. This was even true in February 2021 when they were reduced to an historic low of c. 0.25%, but are no longer the case - there has been betrayal of the traditional understanding.

 

[jpd]

The laws of probability still stand - although it's true that with the lower rate of prizes, especially the € 50 you would have to hold high amounts to get the expected yield

 

[thedaddyman]

Bear in mind as well that whilst you will get your money back, it will also have depreciated over time against inflation unless you have been lucky to win something.

 

[Duke of Marmalade]

Bear in mind as well that whilst you will get your money back, it will also have depreciated over time against inflation unless you have been lucky to win something.

Of course, as I say Prize Bonds are (were) a viable alternative to deposits for large amounts and deposits are also vulnerable to inflation.

 

[jpd]

Can't remember the last time savings accounts offered a rate of return that beat inflation - and I have a long memory!

 

[Duke of Marmalade]

Can't remember the last time savings accounts offered a rate of return that beat inflation - and I have a long memory!

Indeed, all the way back to 2021 I am sure State Savings beat inflation from 2009 to 2020. Anyway, it is comparison with deposits that is relevant.

 

[PMU]

It is not specifically an Irish government issue or EU issue. In the US the federal Reserve is pushing up interest rates to fight inflation (with the anticipated impact on employment and the economy implied by that) while the federal government is simultaneously pushing huge spending programmes to boost the economy. There is no reason to believe an Irish government would behave any differently, even if with a central bank independent from the EU.

So what? Government expenditure does not necessarily push up inflation, if it's largely capex, e.g. motorways, bridges, port facilities, etc. Motorways etc. are not normally found in the consumer price index. It's where government expenditure has a large labour element in situations of rising/high/full employment that it can bid up the price of labour, which will then feed into increased labour costs, increases in the price of services, etc., or where it pumps money into areas where there is short supply. or existing excess demand that it is inflationary.

It is not specifically an Irish government issue or EU issue. In the US the federal Reserve is pushing up interest rates to fight inflation (with the anticipated impact on employment and the economy implied by that) while the federal government is simultaneously pushing huge spending programmes to boost the economy. There is no reason to believe an Irish government would behave any differently, even if with a central bank independent from the EU.

Also, we have practically full employment by national standards; the private sector is generating massive tax returns for the government, etc. there is no need "to boost the economy".

The state should price money in deposits in line with the price of money as set by the ECB, and the best way to do this is to increase the returns on state savings accordingly.

 

[Early Riser]

So what? Government expenditure does not necessarily push up inflation, if it's largely capex, e.g. motorways, bridges, port facilities, etc. Motorways etc. are not normally found in the consumer price index. It's where government expenditure has a large labour element in situations of rising/high/full employment that it can bid up the price of labour, which will then feed into increased labour costs, increases in the price of services, etc., or where it pumps money into areas where there is short supply. or existing excess demand that it is inflationary.

Pushing more money into an economy in which inflation is running hot, and employment is running hot, will contribute to further inflation. Some ways of money supply will impact more than others but all will help in keeping the foot on the pedal. Anyway, bridges, motorways, etc., all require labour, and they require materials and machinery that require labour to produce and supply, etc, etc. Anyway, the US federal boost in spending in not all on roads and bridges, or even green technology. A large chunk of it is on health and social care. I am not judging this one way or another, other than that it reflects government priorities which are much wider than the inflation-control priority of the Federal Reserve.

we have practically full employment by national standards; the private sector is generating massive tax returns for the government, etc. there is no need "to boost the economy"

Rather than "boosting the economy" it seems apparent that an Irish government priority is controlling mortgage rate rises. Low deposit rates suit for this reason. While supporting interest rates rises would be more consistent with ECB policy it is incompatible with a goal of containing mortgage rises. Again, I am making no judgement on this - just observing that government and central bank priorities are not always the same. That goes for governments everywhere - within the EU or not.