Stable prices make saving attractive even with low interest rates

Rapid inflation, both before and after the economic crisis, made borrowing favourable in each of the Baltic States and reduced the point of depositing money – due to the rapid decrease in the purchasing power of money, real interest rates were negative. Since 2014, when making savings related decisions, Baltic families have had to keep in mind a near-zero or even negative change in consumer prices, in addition to the interest rates on deposits, as revealed by the new Baltic Household Outlook organised by SEB.

Before joining the Eurozone, the increase in local consumer prices did not directly affect euro deposit interest rates, and local currency deposits were not offered interest rates comparable to inflation. This is why depositors had to come to terms with negative real interest rates, even if the nominal interest rates on deposits were relatively high.

In the 2000s, the inflation rate exceeded the average interest rate on deposits in each of the Baltic States. In December 2008, the average annual interest rate for Estonian kroon deposits was 5.9 per cent. As the inflation rate amounted to 7.5 per cent, the actual average real interest rate turned out to be negative – minus 1.5 per cent. In Latvia, the average interest rate for two-year fixed-term deposits was 8.7 per cent; however, due to high inflation, the real interest rate was minus 1.6 per cent. The lowest average real interest rate on deposits in domestic currency was exhibited in Latvia, in May 2008 – minus 8.6 per cent; and in Lithuania in June 2008 – minus 6.8 per cent. In Estonia, the average real interest rate on all fixed-term deposits in kroons was minus 6.0 per cent, in February 2008.

The real interest rates on deposits in each of the Baltic States were negative until 2009, when the inflation rate underwent a rapid decline, although the interest rates on deposits continued to grow. As inflation accelerated, the situation soon returned to the way it had been – the actual interest rates on deposits were once again negative in Estonia in 2010 and in Latvia and Lithuania in 2011.

Due to the deceleration of inflation in Latvia, the average interest on up to two-year deposits in lats turned positive in July 2012; in Lithuania, the real interest on fixed-term deposits in litas has been positive since July 2013; and in Estonia, average interest rates on euro deposits have been positive since June 2014. At the end of last year, the average real interest rate on deposits in each of the Baltic States was positive (on the level of 0.5 to 0.7 per cent).

“Families need to save money for unforeseen situations in any case, even in conditions of high inflation where saving money does not seem too wise of a decision because its purchasing power is decreasing. At the same time, an economic environment with low inflation offers positive interest on deposits, even in the case of very low nominal interest rates. This should motivate families to save money. If people do not take real interest rates into account and make decisions based solely on nominal rates, depositing may seem rather unreasonable, Triin Messimas, financial expert at SEB, noted.

Read the full Baltic Household Outlook in English at: www.seb.ee/BHO_aprill_2015

Additional information:

Triin Messimas, Financial Expert at SEB Estonia +372 66 55 167, triin.messimas@seb.ee
Evelin Allas, SEB Estonia Communications Manager +372 66 55 649, +372 51 11 718, evelin.allas@seb.ee