Society is aware that inflation reduces purchasing power, especially when salaries or pensions are not indexed. Few people realize, however, that inflation has a similar adverse impact on savings. Our estimations show that in 2022,
household savings at local banks in the monetary union decreased in real value by approximately NAf. 146 million. This is caused by record-high inflation rates exceeding the interest rates earned on savings accounts. As inflation is expected to keep surpassing interest rates, the negative effects on savings are likely to continue in the coming years.
From an economic perspective, household savings are an essential source of funding for investments and, therefore, for economic activity. Recent survey results by the Centrale Bank van Curaçao en Sint Maarten (CBCS) and the Central Bureau of Statistics have shown that in Curaçao around 52% of the adult population has a savings account, while in Sint Maarten this figure is about 73%. In December 2022, households in the monetary union held a total NAf. 2.77 billion in total savings (defined as household savings- and time deposits) with local commercial banks. The weighted average interest rate on household savings was 1.2% between 2017 and 2022 – with the savings deposits rate averaging around 1.1%, while time deposit rates averaged around 2.0%. On the other hand, inflation in the monetary union has been trending upward, averaging 3.1% between 2017 and 2022. Negative real interest rates – the difference between nominal interest rates and inflation – cause the value of one’s savings to decline, even after earning interest. In other words, savers can buy fewer goods and services with the same amount of saved money.
Household savings in the monetary union increased by nearly NAf. 320 million between 2020 and 2022. However, in 2022 the eroding effect of inflation is calculated to be NAf. 179 million, while earned interest is estimated at only NAf. 33 million, causing the real value of household savings to decline by at least NAf. 146 million. Despite the adverse effects of inflation on savings, the CBCS wants to emphasize that saving remains an important tool for increasing
short-term financial resilience and achieving long-term goals.
This analysis has been published by the CBCS in its Financial Stability (FS) notes, a new set of concise publications, aimed at informing the public about various financial stability topics.
Visit https://www.centralbank.cw/publications/notes-analyses/financial-stability-notes for the FS note.