Fixed-term deposits pay off again

Money. Source: Siim Lõvi/ERR

Economists say that fixed-term deposits are worth it again after 15 years.

Money was losing its value in 2021 and 2022, irrespective of whether it was invested in shares or kept as deposits, said Lenno Uusküla, chief economist for Luminor. Shares had grown during a ten-year period before that, while the purchasing power of money in deposits fell. Now, banks are once again paying interest on deposits and keeping money in fixed-term deposits pays off.

"We haven't seen it for 15 years, meaning that a generation has been brought up without fixed-term deposits. Fixed-term deposits are back," Uusküla said.

Taavi Raudsaar, economist for the Bank of Estonia, agreed. While prices remain high, as does annual inflation, major price advance has slowed recently.

"Over the last six months, prices have gone up by just 1-2 percent due to cheaper energy. With deposits yielding 2-3 percent, the situation begins to look slightly better. It's almost enough to offset inflation," Raudsaar said.

He added that rates offered on fixed-term deposits are among the highest in Europe in Estonia.

"Because Estonia has a series of small banks looking to grow quickly and whose loan portfolios have been swelling faster than deposits, they need to attract more of the latter. That is why rates of return have gone up," Raudsaar said.

ECB interest rate hikes have made borrowing more expensive for banks themselves.

"There is no cheaper way for them to raise the money," Raudsaar remarked.

Another aspect speaking in favor of deposits is that share markets have not been doing brilliantly, Lenno Uusküla said.

"Investments in 2021 pretty much amounted to keeping money in the account."

But Uusküla emphasized that concentrating on a single financial product is not sensible. Raudsaar added that shares are likely to grow faster [than deposits] in the long run, while it is also the riskier game.

"If a person wants to be sure their money will not lose in value, fixed-term deposits are a secure way," he said.


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Editor: Marcus Turovski

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