Inflation in the Eurozone seems to be going in the right direction, falling to 6.9% in March 2023, down from 8.5% the previous month.  What does this mean for interest rates, and your savings and investments?

Inflation is still too high

Firstly, inflation is still higher than where consumers, businesses or policymakers want it to be. That led European Central Bank economist Philip Lane to comment earlier this month that another interest rate hike is coming in May, if the bank’s March projections hold true.

An increase next month would likely see rates rise from the current 3.0% to 3.25% or even 3.5%. With initial indications that markets have settled follows the banking wobbles in March, the ECB is likely to be less hesitant to raise rates than at its last meeting a month ago.

That said, the medium-term expectation is for inflation to return to levels we are more used to. In March the ECB forecast that inflation will average 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025.

So when will interest rates go down? Assuming something like the ECB’s scenario unfolds, we can expect interest rates to recede towards the end of this year.

Good news for savers at last

Meantime, for the first time in years, it is possible to get a return on cash. While any interest you’ll receive is outstripped by inflation, getting 2-3% on your savings is still welcome after years of negative, or at best zero interest.

The Irish banks have continued to pay low rates on deposits however.  So you will need to look elsewhere to gain a return. If you are keen to avoid locking up your money on deposit for a sustained period, that could be using the money markets as we’ve written elsewhere.

If you are willing to lock up your money for some time (typically 3-5 years), you can also secure a return in line with ECB rates. For example right now, Standard Life in Ireland is offering an annual rate of 3.0% backed by Barclays, provided you invest at least €100,000 and keep it there for three years.  If you’re prepared to commit the money for five years, an annual rate of 3.25% will be paid.

We generally avoid opportunities which penalise you for accessing your money. But if you’re risk-averse and cash rich, these rates may be attractive, particularly if interest rates are to fall towards the end of 2023.

The prospect of inflation reducing – and with it interest rates in due course – has helped a recovery in the valuations of company shares, particularly in the technology sector, in the first quarter of 2023.

Are we at a high point for deposit interest?

It looks like 2-3% could be the high point for interest rates paid on cash deposits in Ireland during this cycle.  It’s hardly life-changing, but perhaps attractive for a portion of your savings.

For the rest, it seems risk assets such as equities and bonds will once again be the place where there will be scope to gain meaningful returns.

By investing €400 a month you could save €27,900 in 5 years

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Note: This is an initial indication to help you picture your money. Remember that with investments it is not possible to know for certain what returns you will achieve. Please note the investment warnings at the bottom of the page. This is the approximate before-tax return on an investment which grew at 6% over 5 years.

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