Is It Wise to Put Your Savings in a Deposit Today or Wait for Higher Interest Rates?

Just a year ago, the interest in depositing money in Estonia was rather lukewarm. Nearly 90% of our people and businesses kept their money in bank accounts with negligible interest rates, causing it to constantly lose value due to inflation. In a situation where the interest rates on fixed-term deposits in larger banks had remained very low for years, and inflation had reached as high as 20%, people hesitated to put their money into deposits.

Today, the situation has drastically changed. Interest rates on fixed-term deposits have sharply increased, while the annual inflation has dropped to around 4%. According to the latest forecasts by the Bank of Estonia, inflation is expected to fall to 3.4% next year and 1.9% the year after. Within a year, the average interest rate offered by Estonian banks for fixed-term deposits has risen by over 3%, and several banks even offer interest rates exceeding 4% for certain periods. Generally, smaller banks tend to provide better offers compared to market leaders.

Estonian people have noticed this change, and an increasing number of households and businesses have decided to let their savings grow in fixed-term deposits. Within a year, the volume of fixed-term deposits has more than doubled. Considering the rise in interest rates, Estonian individuals and companies are now earning over 100 million euros in additional interest income annually in this changed environment. To get a complete picture, it should be noted that although the increase has been significant, the share of fixed-term deposits from all deposits is still slightly over 20% today, meaning that hundreds of millions of euros in potential income are left unearned by keeping money in bank accounts.

Sceptical Analysts

The rally in deposit interest rates has led people to question whether the peak in interest rates has been reached or if they can expect further growth that would enable even better profits in the future. In Estonia's more distant history, there were times when deposit interest rates exceeded 10%. However, this was before the introduction of the euro, during the time of the kroon, when there was still a risk of local currency devaluation and an unstable economic situation. In today's economic climate, analysts are rather sceptical about further growth in deposit interest rates.

Despite the fact that the European Central Bank decided to raise interest rates in September, analysts believe that the ceiling has been reached. Along with this, the rise in deposit interest rates is expected to stall, and in the future, a decline in interest rates is anticipated. If this is the case, it is a favourable time to take advantage of the significantly increased returns on deposits and fix the current attractive deposit interest rates for a longer period. Some banks offer the opportunity to deposit with a very high interest rate for up to five years – an option worth considering if you have savings that can be comfortably put away for a longer period.

Higher Interest or a More Flexible Schedule?

For people who anticipate needing their money in the near future, the idea of locking up their savings for years may not be suitable. However, it should be noted that a sum simply left sitting in an account loses its value due to inflation. In such a situation, it is advisable to put accumulated savings into shorter-term fixed-term deposits – it's worth doing some research to find a bank that offers the best interest rates for short-term deposits.

Combining both short-term and long-term deposits could be considered by people who want to have a kind of "peace of mind fund," where money has been saved for three to six months of expenses. Such savings could be distributed among shorter and longer-term deposits.

It would be wise to divide long-term deposits into smaller portions. If the need arises to use some of the savings, some of the deposits can be terminated while others continue to grow. Although accumulated interest income will not be received when a deposit is terminated, there are usually no fines associated with banks. When entering into or terminating a deposit agreement, it is advisable to carefully read the terms and conditions.

Risks in the Stock Market

Of course, there are those who have enough knowledge, skills, and courage to invest their savings in securities for the sake of growth. However, the stock market always carries the risk that a promising deal may result in the loss of some savings. Deposits in banks, on the other hand, are guaranteed by the state Deposit Guarantee Fund up to 100,000 euros per depositor in each bank.

We live in a time when many people keep an eye on the prices of food in stores or try to limit their electricity consumption on days when the stock market prices are high. During such times, none of us should be indifferent to the fact that our savings are losing their value in our current account. Similarly, it is an opportunity to secure stable financial growth for many years with the help of today's high deposit interest rates. Simple calculations show that collectively, clients stand to gain hundreds of millions of euros each year.