How will interest rate falls impact savers?
The interest rate rises of the last year have been a boon for savers but are the tides beginning to change – and what will this mean for savers?
A 12-month period of almost back-to-back interest rate hikes resulted in the cash rate moving from a record low of 0.1% to 3.6% as of March 2023.
However, now leading economists are predicting these rises may be at an end, following the surprise collapse of several US and European banks.
National Seniors Term Deposit
With no fees and flexible terms, the National Seniors Term Deposit allows you to lock in a competitive interest rate that’s protected for your fixed term.
You can earn competitive interest rates up to 4.85% per annum.
National Seniors members can earn a special rate of 4.85% for 6 months, 4.80% for 8 months, or 4.75% for 9 months on maturity for term deposits over $5,000.
The Reserve Bank of Australia (RBA) has been lifting rates to combat surging inflation that remains stubbornly high, in part due to supply chain impacts resulting from the COVID-19 pandemic and the Ukraine War, as well as Australia’s record low unemployment rates. In short, there’s not enough supply to meet demand, which is driving up prices.
But why is it so important to keep inflation under control?
If it goes on for too long, it can result in hyperinflation, where prices rise uncontrollably over a period of time (typically defined by a cost increase of more than 50% over a month). This can cause the currency value to plummet, resulting in increased demand for goods as people try to buy them as soon as they have money, before prices rise even further.
Over the 12 months to December 2022, the Consumer Price Index (CPI) – which measures the increase in cost for an average basket of goods – rose by 7.8%, which is well above healthy levels but still well short of hyperinflation. By increasing interest rates, the RBA is aiming to reduce spending across the economy, which should help to stablise prices and bring inflation back down to their target of 2-3% inflation.
If the RBA doesn’t increase rates quickly enough, inflation could continue spiralling. However, if they increase rates too much too quickly, it could mean individuals and businesses alike are unable to service their loans, leading to mass foreclosures, job layoffs, and a drop in economic growth.
Many leading economists had recently predicted the RBA would continue to raise interest rates until June 2023 – which would mean savers still have a few more months of rises to come. However, the global banking crisis that has emerged over the past few weeks has thrown a spanner in the works.
While Australian banks are largely protected from the same turmoil international banks are experiencing due to stronger regulatory requirements and differing investment strategies, the effects of the global banking crisis could still be felt across the Australian economy and even lead to a recession.
If they are correct, this could mean interest rates rises could stop or even begin to fall.
So, what would this mean for savers?
Term deposits offer a fixed rate of interest for an agreed length of time, or term.
If you already have a term deposit account and the RBA lowers interest rates, your rate will be protected until it reaches maturity. So, even if the rates begin to fall, your interest rate will be protected for the life of the term, and you will continue earning the same amount of interest.
If the RBA lowers interest rates, rates offered for new term deposits could lower. This means if you’re looking to open a term deposit, you could potentially end up with a lower rate if you wait and interest rates begin to drop again.
High interest savings accounts have a variable interest rate, meaning the interest rate can rise or fall depending on whether the cash rate increases or decreases.
This means if the RBA increase the cash rate, you will earn a higher interest rate on your savings, but if they lower the cash rate, you will earn a lower interest rate on your savings.
However, before you panic and empty your bank account, keep in mind it is still a good rule of thumb to have at least three months' expenses in cash in case of emergency. High interest savings accounts give you the flexibility of withdrawing from or adding to the account at any time – which means if a sudden expense comes up, you won’t have to sell other assets or break out of your term deposit early to pay for them.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives.
Sources: The Guardian, RBA, The Conversation
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