With the cash rate at an all-time low, it’s important to make sure that the interest rate on your savings is keeping pace with inflation.
Back-to-back cuts by the Reserve Bank of Australia (RBA) have plummeted our official cash rate to an all-time low of 1 per cent, as of July 2019, in response to fears about a slowing economy and uncertain global economic outlook. What’s more, the RBA is expected to cut the cash rate even further before the end of the year to new historic lows.
This means that if you are relying on your bank savings for interest, you are now getting some of the lowest rates on record, as many banks have lowered interest rates on their savings accounts in response to the rates cuts without passing on those cuts in full to mortgage holders.
According to recent research by comparison website Finder, Australians currently hold a total of $526 billion in savings accounts. Households could therefore stand to lose around $1.3 billion in interest from their term deposits and saving accounts if the banks pass on the most recent rate cut of 0.25 percentage points. The hardest hit will be those saving for their first home and retirees relying on their savings as a form of income.
While many banks offer “above market” interest rates on new savings accounts, these promotional rates usually come with conditions and fall sharply after several months. Once the honeymoon period is over, rates drop down to between 0.2 and 0.5 per cent, which is significantly lower than the current inflation rate of 1.3 per cent.
Inflation is a broad measure of how much the costs of goods and services, such as food, fuel costs, dwelling and utilities, are rising. When interest rates are reduced, people can borrow and spend more money, which in turn stimulates the economy. But lower interest rates also tend to correlate with higher inflation.
The take home lesson is that when it comes to setting savings goals for your future, it’s important not to just rely on standard old methods, but shop around for better deals and, most importantly, get good advice.
You could look around and see which banks or credit unions are currently offering the highest interest rates, and under what conditions, or consider other investment options that may come with higher returns, depending on your personal financial situation and goals.
We’re always happy to have a chat to help you decide what savings or investment strategy is right for you.Call us anytime on (02) 8268 for an obligation-free talk.