Savers must rethink the role of cash in a low-rate world

Author: Patrick Holohan, Head of Investment at Compass Private Wealth

Published: Sunday Business Post, 13 July 2025

From ‘TINA’ to savers and back again

There was a period of time a few years ago when Investment markets adhered to the ‘TINA’ acronym. You had to buy ‘risk’ markets as ‘There Is No Alternative’. This sentiment existed because Cash, and cash like instruments, were carrying zero return (or in the case of some Government bonds, a negative return). So depositors, both personal and institutional had to step out of the certainty of Cash and into the variable world of ‘Risk’.

In 2022, significant inflation bit and the ECB had to drastically start increasing interest rates – terrible for variable rate borrowers but for Cash investors there was now a viable place to park funds and earn without market volatility. Banks and Governments across Europe offered investors up to c. 4% p.a. – all without any perceived risk to the investor.

The last 12 months has seen the end to this era of higher rates. So far, the ECB has cut rates three times this year to the current headline rate of 2%. Investors seeking Cash, or Cash like solutions are now met with matching rates of c. 2% across deposits, government bonds and money market funds. Furthermore, Investment Markets expect these rates to stay relatively similar for the next while. 5 year swap rates and 5 year average government bond yields are settled in the region of 2.3-2.5% so quick about turns to more comfortable yields are certainly not expected.

Cash return considerations 

Investors chasing these types of returns in the short term need to start squeezing the return in order to get the most from their capital. There is much to consider. For example, tax varies dependent on age (for example you may qualify for DIRT exemption) and type of investor (corporate investment versus personal deposits). The solution you invest in will carry either little cost (bank deposits) or potentially a lot relative to the return (money market funds/ government bonds on a stock-broking platform). All these issues eat into the net return you achieve. When this return is being diminished at source by the actions of the ECB, it leads to the need for enhanced focus on the things that can be controlled.

The reason this is in focus at the moment is the current deposit base in Ireland. Household Cash deposits in Ireland are estimated to be c. €163bln, and rising. Some of this will be efficiently managed and earning relatively attractive rates but my experience is that most is sitting on call deposit earning little or nothing at all. A similar situation is unfolding within Corporate entities in Ireland. Family businesses across the country are sitting on a further €80bln in Cash. Furthermore, these piles of cash are estimated to be growing at an estimated 5% per annum as the economy continues to grow.

There is a significant real and often forgotten risk attached to this pile of Cash. Inflation in Ireland (and importantly for ECB decision making also across Europe) is now under control and hence why the ECB is cutting rates. Rates spiked in 2022 due to inflation hitting 8%+, but we now sit at or below the ECB target rate of 2% for inflation. This is good news all round. Controlled inflation allows for controlled decision making – for people and for businesses.

Inflation realities

But, without offset, the capital sitting with no interest return in banks will deteriorate by c. 9.6% over 5 years assuming this 2% inflation rate. Within all of this, is the added complexity of people who actually plan and save for specific things rather than day-to-day expenditure. Housing inflation has averaged at 8% per annum recently. Global health-care inflation is expected to carry 8-10% globally this year. Education inflation is currently running at 4%. All ahead of current headline inflation rates and well in excess of returns available for Cash or Cash alternatives.

Which brings me back to that starting acronym. We are not quite in the same ‘TINA’ situation from 5 years ago, but savers and investors need to be thinking of their capital and what its purpose is – what will the money look like in 5/10/15 years’ time when it is needed. For short term planning and needs then Cash remains king. Look at your strategy and squeeze the return. Beyond this then you need to be thinking about making your funds work in a manner that at least offsets, if not beats inflation relating to yours, or your businesses goals.

Patrick Holohan is Head of Investment at Compass Private Wealth with offices in Dublin and Cork.

Disclaimer: The above is generic in nature and does not constitute financial advice.