Monday, March 18, 2013

More interest in Cyprus

Here is a quick snapshot of retail interest rates in Ireland, Cyprus and for the Euroarea average.

Ireland Cyprus Interest Rates

Consider a saver who had €10,000 in January 2010 and has placed it in accounts with an agreed maturity (of up to 2 years) since then.  Over the three years the Irish saver would have earned a 3.1% average rate of interest and, net of DIRT (which has increased from 25% to 33% over the period), would have around €10,700 in the account today.

A saver in Cyprus using similar accounts would have earned 4.2% on average on their deposit and, net of the 15% Cyprus Defence Levy applied to interest income, would have had €11,100 in their account last week.

If the proposed “stability levy” at 6.75% is applied to this balance it would reduce it to €10,400, some €300 less than their Irish counterpart.  The interest rate and tax differentials would see this difference eliminated before the end of next year.

When compared to the Euroarea average it is likely, given the interest rates above, that the outcome over the three years since 2010 for the Cypriot saver even with the proposed levy would be close to that for the Euroarea average.

And how about inflation over the three-years?  Here is the average of the annual HICP inflation rate since January 2010.

  • Ireland: 0.6%
  • Euroarea: 2.3%
  • Cyprus: 3.0%

Inflation was highest in Cyprus but is not substantially below the Euroare average.  The lower rate for Ireland is mainly driven by the price deflation experienced up to the end of 2010.

Of course, this mechanical approach suggesting Cypriot savers aren’t doing too bad is utterly irrelevant and completely ignores the wider reality of targeting deposits (and particularly guaranteed deposits) in this manner but that is getting plenty of coverage and providing much speculation elsewhere.

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