During inflationary seasons, high-yield bank deposits seem to be a safe haven, as their return is clear, their term is fixed, and their risks are less than stocks, bonds, or currencies. But the most important question for the owner of small savings is not only related to what the bank announces, but rather what remains of purchasing power after inflation, taxes, and fees.
Nominal or real return?
The declared return on the deposit is a nominal return, while the protection of savings is measured by the net real return. The European Central Bank explains the difference by saying that the nominal interest rate is the price agreed upon or paid on the loan or deposit, while the real interest rate takes the change in purchasing power into account.
Read also
list of 2 itemsend of list
In the approximate formula: real return on the deposit = nominal return (-) inflation.
In a comment to Al Jazeera Net, the Executive Director of VI Markets, Dr. Ahmed Moati, said that high-yield deposits do not always protect savings from erosion due to inflation, warning against just looking at the return rate announced by the bank.
Moati explained that the fundamental difference here is between the nominal return and the real return:
- The nominal return is the percentage that the bank announces on the deposit.
The real return is what remains for the saver after deducting inflation, in addition to the taxes and fees that countries impose on savings returns.
He explains that a deposit granting a nominal return of 20% may seem attractive, but if inflation in the country reaches 28%, the saver does not achieve a real gain, and his purchasing power is eroded by approximately 8%, according to the following:
- Nominal return (20%) – Inflation (28%) = Real return (negative 8%)
However, if the nominal return is 20% and inflation is 15%, the real return is not 20%, but only about 5% before taking into account any taxes or fees, according to the following:
- Nominal return (20%) – Inflation (15%) = Real return before taxes (5%)
Therefore, Moati believes that the correct calculation for the depositor does not stop at comparing the declared return with inflation, but rather must include fees and taxes, if any, to find out the real return in the end.
The return is not enough
Interest rates set by central banks affect deposit returns, but they are not alone enough to judge a saver’s gain.
- In the United States, at its last meeting, the US Federal Reserve kept the federal funds interest range at 3.5% to 3.75%, while stressing that inflation is still high and that its long-term goal is to return it to 2%.
- And in BritainThe Bank of England explains that the base interest rate affects the returns on saving and the cost of borrowing. Raising interest makes this saving more attractive, unlike borrowing. The bank offers the interest rate at 3.75%, in the context of an inflation target of 2%.
It is not enough for the deposit to be “high yielding” compared to the past or compared to a current account, but rather it must be compared to expected inflation during the term of the deposit, taxes and fees, and the opportunity price in other investment instruments.
In economies with higher inflation, the nominal numbers appear larger:
- In Turkey, the Turkish Central Bank kept the key interest rate at 37% on June 11, 2026, and kept the overnight borrowing rate at 35.5% and the overnight lending rate at 40%, while data from the Turkish Statistics Authority showed that annual consumer price inflation reached 32.61% in May 2026.
This means that the comparison between interest and inflation may appear positive before taxes and fees, but it alone does not answer the depositor’s question:
Does the deposit available to him actually give this return? Is the inflation he faces in food, housing, education, and treatment close to or higher than the official average inflation?
It is not enough for the deposit to be “high-yielding” compared to the past or compared to a current account, but rather it must be compared to expected inflation during the term of the deposit, taxes and fees, and the opportunity price in other investment instruments.
Reasons for demand for deposits
The depositor knows the principal amount he deposited, the rate of return and the maturity date. In a society that experiences sharp fluctuations in stocks, currencies, or real estate, the deposit itself becomes a psychological advantage that is no less important than its financial return, according to Vanguard Investment Management and Financial Services.
- Institutional security
Many banking systems provide full or partial guarantee for deposits. In the United States, the Federal Deposit Insurance Corporation states that standard coverage is $250,000 per depositor at each insured bank and per account ownership class.
In the European Union, deposit protection systems guarantee up to 100 thousand euros (about 115.7 thousand dollars) for the depositor, and are also designed to limit cases of mass withdrawals when a bank defaults.
This guarantee does not eliminate all risks, but it makes a deposit within the insurance limits a preferred tool for emergency funds and near-term obligations.
- High interest
When central banks raise interest rates to fight inflation, the increase is gradually transferred to deposits and savings certificates, so the saver feels that keeping the money in the bank has become rewarding after years of low returns.
This explains the waves of demand for high-yield certificates during periods of inflation or after currency devaluations, especially in countries where small savers do not have easy access to bond funds or global markets.
- Consumption control
A deposit or certificate limits immediate consumption because it restricts access to money for a specified period, and breaking it early results in a fine or loss of part of the return, according to the US Consumer Financial Protection Bureau.
A study of commitment savings products in the Philippines found that accounts that restricted access to savings helped some customers increase their savings.
Therefore, a deposit does not protect money from inflation alone, but it may help some families protect the principal from rapid spending in an environment of rising prices.
Reasons for aversion to deposits
- Negative return
The first thing that puts savings holders off deposits is the negative real return. The European Central Bank explains that the real return measures what remains of the nominal return after accounting for inflation, and that a deposit may achieve a positive nominal return while its real return is negative if inflation is higher than the declared return.
When inflation is higher than the net return after taxes and fees, the deposit turns into an organized way to reduce loss, not into a way to achieve real gain, especially if raising interest rates is delayed due to the inflation wave or if the inflation that families face in their daily spending is higher than the average official inflation.
The US Consumer Financial Protection Bureau defines a certificate of deposit as a savings account in which the customer usually agrees to keep his money for a specified period, and that early withdrawal means paying a penalty to the bank.
Therefore, the declared return may not be suitable for someone who needs money within a few months, even if it looks attractive on paper, because breaking the deposit or certificate before the maturity date may reduce the actual return or eat up part of it.
The International Monetary Fund indicates in a study on the transmission of the impact of exchange rate changes to inflation that the impact of a currency decline on prices is faster and stronger in cases of large declines, and that the subsequent recovery of the currency does not fully reflect this impact and at the same speed.
Therefore, in economies that witness frequent devaluations or a gap between the official rate and the parallel rate, a high local deposit may not be enough to compensate for the decline in purchasing power against imported goods or travel, education and treatment costs denominated in a foreign currency.
The Federal Deposit Insurance Corporation in the United States confirms that the standard coverage for insured deposits is $250,000 per depositor in each insured bank and for each ownership class, while the European Commission sets deposit insurance in the European Union at a ceiling of 100,000 euros (about 115.7 thousand dollars) per depositor, and says that these systems aim to protect savers and limit the collective withdrawal of deposits when banks fail.
Official guarantees remain important, but they are limited by ceilings and conditions. Depositors in crises may worry about restrictions on withdrawal or transfer or lengthy compensation procedures, leading some societies that have experienced banking crises or capital controls to prefer gold, foreign exchange, or real estate, even when the nominal deposit is high.
- Negative interest
According to the European Central Bank, central banks may resort to negative interest rates when interest rates are close to zero and monetary policy needs more stimulus, with the aim of encouraging lending, spending and investment rather than hoarding liquidity.
Negative interest rates do not usually appear because the economy is strong, but rather because they are an exceptional tool used when traditional cuts in interest rates are unable to push inflation and economic activity towards the target.
Europe, Japan and Switzerland witnessed the most prominent experiments. In the eurozone, the European Central Bank kept the deposit facility rate at negative levels from June 2014 until July 2022.
In Japan, the Bank of Japan decided in January 2016 to apply an interest rate of negative 0.1% to a portion of current account balances held by its financial institutions, as part of a policy aimed at achieving inflation at 2%.
In Switzerland, in January 2015, the Swiss National Bank reduced the interest on demand deposit balances above the exemption limit to negative 0.75% in the context of its decisions related to the exchange rate and monetary policy.
But negative interest was not always passed directly to individual depositors. Member of the Executive Board of the European Central Bank, Isabel Schnabel, explained that the transfer of negative interest rates to household deposits in the euro area was very limited, and that a very small percentage of individual deposits received negative rates, while their transmission to corporate deposits was larger.
This explains why many banks have avoided charging families an explicit cost for their deposits, for fear of backlash, and why individuals can theoretically keep cash outside the bank if the deposit becomes directly costly.
However, the ECB explains that negative interest rates are sufficient to change social behavior towards saving, and links this policy to an attempt to make saving less attractive and borrowing and spending more attractive.
When people do not receive a return on deposits, or when they fear paying fees on liquidity, the tendency increases to look for alternatives such as real estate, gold, foreign exchange, money market funds or higher-risk investment vehicles.
This may be part of the stimulus goal of monetary policy, but it places the small depositor facing a difficult trade-off between maintaining liquidity and accepting risks that he does not fully understand.
