Banks increasingly paying interest on savings deposits
Interest rates on term deposits are on the rise, but banks in Estonia haven't been paying interest on demand deposits — i.e. money sitting in bank accounts — for years already. Banks are now experimenting with paying interest on money sitting in savings accounts, although they don't expect to see a big increase on demand deposit interest rates.
According to Bank of Estonia economist Taavi Raudsaar, interest rates offered by banks on deposits depend on several factors, but first and foremost on to what extent the banks need additional funds and how high the price of alternative funding sources is.
"Loan growth has outpaced the growth of deposits recently, and banks' need to attract additional deposits has increased as a result," Raudsaar explained. "The European Central Bank (ECB) has also raised policy interest rates, which has also increased the price of alternative financing options. As a result, interest rates on term deposits have quickly started to rise again."
For those who nonetheless want to earn interest on money they have sitting in their accounts, banks are recommending term deposits with longer maturity.
During the economic boom at the turn of the century, average interest rates on fixed-term deposits sometimes reached as high as even 5 percent, however even then high interest wasn't paid on demand deposits, remaining at just 0.6 percent on average.
Pricier packages, new savings products
Currently, commercial banks in Estonia are still offering interest rates of zero percent or close to it on current accounts. They are, however, starting to experiment with paying interest on new products as well as client packages with higher monthly fees.
For example, Coop Pank is offering 1 percent interest on current accounts under packages with a monthly fee of €4.99. According to CFO Paavo Truu, the bank is being motivated to pay interest by big growth ambitions.
Banks have, however, begun paying interest on savings accounts. Swedbank, for example, pays interest on its Easy Saver (Rahakoguja) savings account, and just raised its interest rate from 0.5 to 1 percent.
Coop Pank likewise pays 0.02 percent interest on money held in a savings account. SEB, meanwhile, pays 0.75 percent interest on savings deposits.
Clients can quickly withdraw money from savings accounts at any time, as with regular bank accounts.
LHV pays 0.01 percent interest on demand deposits.
"You can see based on this that if a client has money in their account that they don't need for a longer period, it's sensible to make a fixed-term deposit," said Kadri Haldre, head of treasury and investor relations at LHV.
An interest rate of 0.01 percent means that interest is only earned if a client has at least €18,000 in their account, as daily interest rounds down to below one cent. LHV offers 1 percent interest rates to clients subscribing to more expensive monthly plans.
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Editor: Aili Vahtla