Parking your money into tight spots

JP Pelosi

Thursday 04 June 2020

Our low interest rates are helping many Aussies pay off their properties right now, which works well in a country that’s obsessed with real estate. Indeed, anyone with a home loan can attest to a spring in their step whenever the Reserve Bank announces yet another rate cut. 

The same goes for anyone with a personal loan, let's say for a brand new Range Rover or Mini Cooper. This type of borrower only benefits from repayments that incur a relatively small amount of interest.

In short, borrowers and those people with large debts benefit from these record low 0.25% interest rates, which are on hold - for now. 

But savers? Well, they face lower returns and an ongoing fizzle. 

Interest rate winners and losers

Over the years, economic experts have talked about the winners and losers of interest rate cuts in demographic terms. For example, while baby boomers are said to have benefited from our expanding economy, low rates makes their retirement much less lucrative.

And yet, this situation is really about all of us who want to save some money and who are not being given the type of return we deserve for our frugality. Putting money in a safe place like a savings account or even a term deposit seemed a sensible idea during the COVID-19 pandemic. Now there’s less certainty in such an idea as rates continue to fall. 

Our Mozo experts report that due to the heavy cutting of Term Deposit rates, the average rate for a 12-month deposit is down 16 basis points in the last month alone. Sure, some providers like ME Bank and UBank gave customers a chance to grow their balance during the pandemic by either waiving bonus rate conditions or having the ability to earn the top interest rate. But most made cuts. 

And, among the savings account providers we track, 87 have lowered their at-call savings rates since March, leaving the market average at just 0.74% p.a. Bank of Queensland, 86 400 and Up Bank currently offer the joint highest ongoing bonus rate at 1.85% p.a., which is 1.11% higher than average, according to our experts.

A lack of consumer confidence

So, where does this leave us after our recent lockdown and subsequent hand-wringing over the state of the economy? You might not realise it but we apparently lack confidence, various consumer indexes suggest. 

The RBA Governor spoke about this recently, noting that the government must firstly restore confidence so that we can go about our lives and remain healthy, and then our boosted morale will manifest into creating more jobs and steady incomes. This, in turn, will restore the economy.

More simply, we need to get out of this slump. We've lost faith in what were once considered social norms, like lining up for a coffee, catching the bus or sitting in an office. When you can't be confident about the basics, it's hard to have confidence in much else.

This brings us back to rates. One way to snowball positivity is through monetary policy, and for many nations, such policy has long called for adjusting the official cash rate. So, by bringing our rate down to 0.25%, the RBA has for some time hoped banks and other lenders would reduce their rates concurrently and make money readily available to you and me to spend.

However, when something like a pandemic throws a spanner in the works, it's really hard to think about spending, isn't it? Most of us have bunkered down in recent months, probably with an eye toward saving more than spending - with the exception of a few cheer-me-up TV streaming or clothing purchases.

Even the RBA recognises the limits of monetary policy in this regard: there are just some things that are hard to control and how we react during a global crisis is one of them.

Don't be so negative

This takes us to a further strategy and the prospect of negative interest rates, which perhaps once seemed an impossibility to older Aussies who for a time worked amid a 13% interest rate world. Many people long for the eighties and in more ways than one.

Things are different now and many global economies are said to be "depressed", including our own. It might be just the scenario that allows interest rates to slide into the negative, a strange prospect for anyone thinking about saving over the long term. Parking your money with a bank would then effectively offer you no benefit other than a place to, well, park it - and at a cost. 

No, the RBA doesn’t want to go down that road, surely. While you're merely accruing pennies at the moment, you'd really lose money - and more confidence - in this negative interest rate scenario. 

It might make more sense to invest in some other way. A term deposit at least locks in your rate. If you picked up a half-decent rate now, you might end up with something worth discussing at a dinner party in 2030. Who knows, by then someone might even shake your hand for having the foresight.

Read our full Banking Round-up for May's key numbers.

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