State Savings have abandoned the small saver

[Duke of Marmalade]

The message is the same for all State Savings products despite (or because of) the recent meagre increases. Prize Bonds provide the starkest example.
The Prize Bond rate was set at 0.35% p.a. in February 2021, an historic low. Okay, 10 year Government bond yields were negative -0.3% then so State Savings did represent a sort of social bonus, as they had always done. For comparison, at that time UK Premium Bond rates were 1.0% and UK 10 year Gilt yield was 1.3%.
Since then Irish government bond yields have risen by over 3% and UK gilt yields by about 2.5%.
But while the UK has increased the Premium Bond rate to 3.3% NTMA has left the Prize Bond rate unchanged at 0.35%.
This is very clearly an abuse of those who have learnt to trust State Savings to provide a fair rate and are unlikely to stampede for the exits on what is a clear breach of that trust.

 

[Sarenco]

The NTMA has a number of competing objectives when setting the rates on State Savings products.

If the NTMA substantially jacked up rates, there would be a flow of money out of bank deposits.

Sure, banks could increase rates to maintain those deposits but they would then increase the rates charged on loans to compensate.

That would hamper the ability of households to finance house purchases, which is obviously a policy priority for the State.

So I don’t see any prospect of the NTMA substantially increasing rates on State Savings products while domestic bank deposits rates remain low.

 

[Duke of Marmalade]

@Sarenco that is a good explanation which I suspect is substantially correct, but is it fair?
I guess mortgage holders have more political clout than prize bond owners. It is also part of that generation thing "we are the first generation to be worse off than our parents" and state savings vs mortgages is very much a generational divide (ignoring gifts of prize bonds to newly borns )

 

[skrooge]

Between Brexit and mini budgets I'm not sure the UK is the best examples to be using.

Whatever people might use the state savings for they are just a way of raising money for the government of the day. It's basic supply and demand. With bulging corporate tax receipts why should they pay over the odds for funds they don't currently need?

Government policy is probably better spent providing targeted supports to those who really need help rather than giving to those who have excess savings.

 

[basilbrush]

Government policy is probably better spent providing targeted supports to those who really need help rather than giving to those who have excess savings.

The alternative for the government is borrowing money at a 3% interest rate. At least with the likes of prize bonds that interest is going back to the population.

 

[Duke of Marmalade]

It's basic supply and demand.

That's my point. It is an abuse of the supply and demand dynamics. As @basilbrush has pointed out they pay the big boys and girls (mostly foreign) nearly 10 times the interest rate that they pay their own pensioners' state savings, knowing the latter will not in general walk.
The UK is relevant as they pay their pensioners' state savings roughly the same interest rate that they pay the big girls even though they too could get away with screwing the financially ignorant and vulnerable pensioners.
BTW do not be fooled by a few billion corporate tax windfalls. This country owes €250 billion which it constantly has to repay and roll over. It is a borrower, big time, and always will be.

 

[Sarenco]

…but is it fair?

Is it fair that we have some of the lowest new business mortgage rates in the Eurozone?

Well, it’s certainly helpful to a generation that haven’t had a heck of a lot of luck so far when it comes to housing.

In the grand scheme of things, I think boomers have done ok.

Even with the travesty of low rates on State Savings!

 

[skrooge]

That's my point. It is an abuse of the supply and demand dynamics.

I'm not sure Adam Smith would agree with the word abuse in the same sentence of supply and demand.

State savings were designed as a way of encouraging people to save . But times have moved on and the market for savings products has matured. Banks and credit unions offer the equivalent product so there really isn't a need for the State to play a large role.

The UK is relevant as they pay their pensioners' state savings roughly the same interest rate that they pay the big girls even though they too could get away with screwing the financially ignorant and vulnerable pensioners.

If you're making the case that state savers are pensioners then you need to look at their full suite of supports. There are a range of supports that are better suited to targeting the worse off. In contrast increasing the savings rates would be, at best, un-targeted and more likely to be regressive. After all it would disproportionally help the wealthier saver/pensioner and do little for the very poor.

BTW do not be fooled by a few billion corporate tax windfalls. This country owes €250 billion which it constantly has to repay and roll over. It is a borrower, big time, and always will be.

Of the €236 billion debt only €20 billion is state savings. It's probably the case that most of that debt is a stable source of funding. However, it's not a set of products that will generate large amounts of funding in a reasonable period of time. So not a realistic means of raising funds for refinance existing debt or other purposes.

 

[PMU]

Sure, banks could increase rates to maintain those deposits but they would then increase the rates charged on loans to compensate.

Correct. This is the purpose of monetary policy in inflationary times. If the price of money is increased, i.e. the rates charged for loans, spending at the margin decreases. Reduction in the supply of money will lead to a reduction of inflation.

That would hamper the ability of households to finance house purchases, which is obviously a policy priority for the State.

The increase in financing a mortgage, due to increased mortgage rates, will mean some households, i.e. those intending to take out mortgages, cannot now finance mortgages. This should cause house prices to fall or moderate any price increase, where the increase in interest rates causes a reduction in the supply of mortgages, as certain prospective house buyers cannot afford them.

Also, and perhaps more importantly, if households have increased mortgage payments, they have less money to buy goods and services, which will also cause a reduction in the price or prevent an increase in price of these items, thus lowering inflation, which is the objective of the ECB. [It may also tend to lower growth in the economy, but runaway inflation will have disastrous consequences for the economy even in the medium term.)

So I don’t see any prospect of the NTMA substantially increasing rates on State Savings products while domestic bank deposits rates remain low.

It’s the other way around. If the NTMA increases interest rates on state savings, money will flood out of the banks and into state savings, unless the banks increase their deposit rates accordingly. [A move that inter alia would benefit those saving with banks for house deposits.]

The current low retail deposit interest rates that do not reflect the ECB’s view on the price of money, are an indirect subsidy to Irish banks. In March this year the ECB raised its interest rates by half a percent, so its deposit rate, i.e. the rate it pays on banks’ deposits, is now 3%. Monetary policy decisions . So any Irish bank that deposits money at the ECB earns 3%, while Irish banks 1 year retail deposit rates are 0.49%AER (AIB and BoI) and 1%(TSB), so they pocket the difference, and it’s totally risk free. And the reason they get away with it is the very very low rate of interest paid by their main competitor for retail deposits - state savings.

 

[Early Riser]

Also, and perhaps more importantly, if households have increased mortgage payments, they have less money to buy goods and services, which will also cause a reduction in the price or prevent an increase in price of these items, thus lowering inflation, which is the objective of the ECB.

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.

 

[SoylentGreen]

As my NTMA accounts mature, I am cashing them in and putting the money to use elsewhere. I would prefer to use the bank of Mom & Dad to save my children interest on their mortgages than get the paltry returns on these State products.

 

[moneymakeover]

Is it the case that the state savings rates are lagging?
In other words they have agreed a rate for 3/4.5 years
It turns out we can get a better rate elsewhere now.
SSA are not going to change existing terms.
But the next offering will probably be more competitive?

Similarly if ECB rates started to go down SSA rates might appear more attractive that the alternatives ie lagging again.

 

[Duke of Marmalade]

I'm not sure Adam Smith would agree with the word abuse in the same sentence of supply and demand.

My point was (and I think you got it) that the supply/demand dynamic is very asymmetric as between the State and the pensioners (mostly). This is the first time that I recall that the inertia of state savings has been so cynically exploited - though as @Sarenco says, maybe it is done in the greater scheme and, yes, pensioners have been very well treated e.g. on the state pension.

State savings were designed as a way of encouraging people to save .

Agreed and not as you said previously "just a way of raising money for the government of the day"

But times have moved on and the market for savings products has matured. Banks and credit unions offer the equivalent product so there really isn't a need for the State to play a large role.

There is something dysfunctional going on at the moment. Deposit rates have completely failed to follow ECB rates. State savings should have been used, as previously, to put manners on what is a very asymmetric relationship between banks and small savers - but of course we do have the @Sarenco point.

If you're making the case that state savers are pensioners then you need to look at their full suite of supports.

Agreed

There are a range of supports that are better suited to targeting the worse off.

Fair point.

In contrast increasing the savings rates would be, at best, un-targeted and more likely to be regressive. After all it would disproportionally help the wealthier saver/pensioner and do little for the very poor.

Not sure about that. See other thread on investing in Govies. Pensioners with say over €100k to invest can get crumbs from the big girls' table and enjoy over 2% p.a., government guaranteed.

Of the €236 billion debt only €20 billion is state savings. It's probably the case that most of that debt is a stable source of funding. However, it's not a set of products that will generate large amounts of funding in a reasonable period of time. So not a realistic means of raising funds for refinance existing debt or other purposes.

Agreed and again this counters your assertion that it is "just a way of raising money for the government of the day". It has developed into a sort of social service to bring some balance into the small saver/big banks relationship.

 

[Duke of Marmalade]

Is it the case that the state savings rates are lagging?

That excuse is partially valid but was wearing thin and was completely exploded when about two weeks ago they announced one of their periodic revisions to state savings rates. The revised rates were meagre, to put it mildly. For example, 4 year National Solidarity Bond was set at 0.50% AER despite the fact that 4 year Irish Government Bonds are trading at 5 times that interest rate.
To add insult to injury they didn't adjust the Prize Bond rate at all.

 

[skrooge]

My point was (and I think you got it) that the supply/demand dynamic is very asymmetric as between the State and the pensioners (mostly). This is the first time that I recall that the inertia of state savings has been so cynically exploited

Yes supply (of available savings) are high and demand (from the State for this money) is low so price (state savings rate) is low. No abuse, just basic economics.

I think moneymakers point is a good one. The change in direction of monetary policy is still fairly recent, we're less than a year into rate hiking after a decade of extremely low rates. Still hope for those blinkered investors who can't see beyond a prize bond to get a few extra pennies. However, given the current factors effecting supply and demand any short-term increase will likely be modest.

Agreed and not as you said previously "just a way of raising money for the government of the day"

Like many government initiatives it WAS designed to encourage a behaviour . In its day , decades ago, it was to encourage personal savings. However, the financial system, and the people using it, have matured. It's now pretty redundant as a policy tool. From a savers perspective, it's been mostly replaced by the private sector banks and credit unions. NOW it's an (inefficient) sytem through which the government can raise some small change.

There is something dysfunctional going on at the moment. Deposit rates have completely failed to follow ECB rates.

A couple of points on this:

See above explanation on supply and demand. Nothing dysfunctional, you might not like the outcome but very much in line with how a functioning market should work.

Of course you're right on the inertia. To channel my inner "Duke of Marmalade" I'd nearly go as far to say savers are "self abusing". Just look at the savings rates on offer to Irish depositors. Why more people haven't moved their money is beyond me. The more people move their money the more likely Irish retail banks (and maybe even state savings?) are to react.

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While I wouldn't expect all pensioners to move to these providers on mass I would have thought there would have been more of a reaction from other depositors but not so far it would seem.

State savings should have been used, as previously, to put manners on what is a very asymmetric relationship between banks and small savers

It's an interesting point. I'm not sure the relationship was as exactly as you described. I can imagine, in decades past when we were a closed system, state savings was a tool used to aid monetary policy. However, now that monetary policy is conducted on a pan European scale and we're more bank focused, the benefits to monetary policy from (Irish) state savings have reduced.

Not sure about that. See other thread on investing in Govies. Pensioners with say over €100k to invest can get crumbs from the big girls' table and enjoy over 2% p.a., government guaranteed.

I'm not sure what any of this means. But my point is government policy should be spent helping those people who need i.e., pensioners on or below the poverty line. Not those pensioners who have €100k spare cash sitting around.

 

[Duke of Marmalade]

Yes supply (of available savings) are high and demand (from the State for this money) is low so price (state savings rate) is low. No abuse, just basic economics.

I wasn't referring to asymmetry of supply and demand. I was talking about asymmetry of power in the relationship. The state have monopolistic power in setting the price and have until recently exercised it in a manner to put manners on the relationship between small savers and financial institutions. But as @Sarenco I think correctly surmises they have a different agenda at the moment - keep down the rise in mortgage rates. I think there is little doubt that if state savings rates were increased in line with the market interest rate it would trigger rises in the retail interest rate across the board - not what the government wants.

See above explanation on supply and demand. Nothing dysfunctional, you might not like the outcome but very much in line with how a functioning market should work.

Of course you're right on the inertia. To channel my inner "Duke of Marmalade" I'd nearly go as far to say savers are "self abusing". Just look at the savings rates on offer to Irish depositors. Why more people haven't moved their money is beyond me.

That is what I mean by dysfunctional - you agree, in fact current market behaviour is "beyond you". But I am sure a semantic argument can be made that it is not technically "dysfunctional" - but let's leave that to the Jesuits.

The more people move their money the more likely Irish retail banks (and maybe even state savings?) are to react.

It's a good point and yours truly is a poster boy for the syndrome. I am reasonably financially aware and yet, irrational as I know it is, a Latvian deposit guarantee just doesn't cut it for me. The single market ain't really working in retail financial services - a fact which is really evident in the residential mortgage market.

It's an interesting point. I'm not sure the relationship was as exactly as you described. I can imagine, in decades past when we were a closed system, state savings was a tool used to aid monetary policy.

Well not monetary policy, that is the ECB's but given the little guy a fair crack of the whip can benefit from some social intervention in the savings market IMHO. You come across as a bit leftie. I'm leftie myself, as dukes go. I'm surprised you are not championing a fair deal on state savings for the little guy.

I'm not sure what any of this means. But my point is government policy should be spent helping those people who need i.e., pensioners on or below the poverty line. Not those pensioners who have €100k spare cash sitting around.

Apologies, I thought you were reasonably well clued in. Treasury Bond 2027 is currently yielding 4 times the interest rate as 4 year National Solidarity Bond and has the same government guarantee. You said that increasing state savings rates would " disproportionally help the wealthier saver/pensioner". We are a long way from the "wealthier" pensioner having anything to do with state savings.

 

[skrooge]

I wasn't referring to asymmetry of supply and demand. I was talking about asymmetry of power in the relationship.

In practice what is the difference?

The state have monopolistic power in setting the price

If you have a narrow view of the savings market where you only see state savings then yes there is monopolistic view but it's not a credible perspective.

That is what I mean by dysfunctional - you agree, in fact current market behaviour is "beyond you". But I am sure a semantic argument can be made that it is not technically "dysfunctional" - but let's leave that to the Jesuits.

It's a good point and yours truly is a poster boy for the syndrome. I am reasonably financially aware and yet, irrational as I know it is, a Latvian deposit guarantee just doesn't cut it for me. The single market ain't really working in retail financial services - a fact which is really evident in the residential mortgage market.

It's not dysfunctional, nor would I say are you, it's just you put greater value on the things you know -which is fair enough. I'm just surprised so many people have a similar view.

Well not monetary policy, that is the ECB's but given the little guy a fair crack of the whip can benefit from some social intervention in the savings market IMHO. You come across as a bit leftie. I'm leftie myself, as dukes go. I'm surprised you are not championing a fair deal on state savings for the little guy.

So you want equal outcomes - regardless of how much effort you don't put in. What we are presented with is equal opportunities. No it won't reward inertia nor had it ever.

 

[Duke of Marmalade]

If you have a narrow view of the savings market where you only see state savings then yes there is monopolistic view but it's not a credible perspective.

The interest rate on state savings had not been altered for over two years since February 2021. Can you think of any other market that Adam Smith would perceive as functioning where the price could be held so steady and any changes decided at the whim of one side of the relationship?

So you want equal outcomes - regardless of how much effort you don't put in. What we are presented with is equal opportunities. No it won't reward inertia nor had it ever.

I don't really get this. I am asking for fair rates on the little guy's state savings just as it used to be and you label me a communist

 

[skrooge]

I am asking for fair rates on the little guy's state savings just as it used to be and you label me a communist

Not labeling you anything at all. Just trying to sift through the layers of hyperbole and figure out the point you've been trying to get to. You've posted plenty but nothing to actually support the title of the thread.

To sum up: if you take a step back there are plenty of savings opportunities for the "little guy" but ultimately if the "little guy" wants re-enact the parable of the drowning man that's their choice.

 

[Duke of Marmalade]

You've posted plenty but nothing to actually support the title of the thread.

Title changed.