In recent weeks we have seen Eurozone inflation cool as the ECB’s inflation fighting measures have taken effect. Figures for July showed a year-on-year increase of 5.3% in the 20-member currency bloc. Whilst in Ireland, figures released from the CSO last week showed that headline inflation fell to an 18-month low of 5.8% in July. Despite these positive signs, it is still important to recognise that we remain at a significantly elevated level of inflation. The target rate for inflation in the Eurozone (which has largely been achieved over the last decade) is 2%.
In this economic environment, real returns on investments are prudent to consider. Although deposit rates have increased (albeit at a somewhat slower pace in Ireland), deposit holders may still see diminished returns. Between April 2022 and April 2023, interest rates on household bank deposits in Ireland increased by about 1.63%, whilst inflation increased by about 6.3% over the same period. This highlights the opportunity cost of storing money on deposit. The deposit rate increase is more than wiped out by the effect of the higher inflation. The real value of deposits will decline given the low rate (albeit with low nominal risk) of holding money on deposit. For those with longer term savings goals in mind, there has never been a more crucial time to consider lump sum investment products.
As always, if you wish to discuss anything in further detail, please do get in touch.