Published On: Sat, May 27th, 2017

Income paid by cash in the bank hits record lows, may fall further

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INTEREST rates paid on almost all types of savings accounts have dropped to record lows, increasing financial pressure on millions of retirees and first home savers.

New Reserve Bank data shows that term deposits, online savings accounts and bonus savings accounts are today paying about one third of the interest they were a decade ago, and forecasters do not see them rising any time soon.

The long run of low rates is prompting some people to switch their money into shares, which are much riskier than cash but in some cases are offering income three times higher than cash in the bank.

The RBA figures show that average interest rates on online savings accounts have dropped from 7.3 per cent to 1.65 per cent since 2008, and the average rates paid on term deposits is down from 5.25 per cent to 2.05 per cent.

 

BetaShares chief economist David Bassanese said the low rates reflected low inflation and were a lingering result of drastic cuts to official interest rates by the Reserve Bank during the Global Financial Crisis in 2008 and 2009.

An income squeeze from cash in the bank is hurting savers and retirees.

“Rates haven’t really been put up since the GFC,” he said.

“The bad news for savers is that the Reserve Bank seems unlikely to raise interest rates within the next six months, and probably the next year, and there’s a risk that they could cut more if the economy remains sluggish.”

AMP Capital chief economist Shane Oliver said while low rates had kept the Middle Australia mortgage belt “relatively happy”, it was a different story for the oldest and youngest generations.

“People saving up for deposits and older Australians with their money in bank accounts — that they use to fund their cash requirements — they’re the ones getting hit,” he said.

Dr Oliver said some savings account interest rates had a slight increase last year “but that was very brief and didn’t stick for very long at all”.

A long run of low interest rates has hit Aussie savers. Picture: iStock

 

He said factors keeping interest rates down included low inflation, sub-par economic growth and record low wages growth.

“I think the RBA is going to be on hold for a long period. For the remainder of this year, if the RBA is going to do anything, there’s a chance it will cut rather than hike.”

While cash in the bank comes with government guarantees, Mr Bassanese said investors seeking income were being tempted to take on more risk by putting their money into the share market.

“If you can withstand the volatility in the market, there are some good investment options,” he said.

Share dividends usually come with a tax credit of 30c in the dollar, which translates to an extra 1-1.5 per cent income return on top of the dividend yield.

 

 
[“source-ndtv”]