THE cut in interest rates came as everyone expected and delivered half of 1 per cent, rather than the quarter we are accustomed to.
It was a good story for mortgage holders, but now what for savers? With the cash rate at 3.75 per cent, what do Australia's retirees and near-retiring workers do? The 0.5 per cent rate cut represents money saved for mortgage holders but it means less income for those relying on cash deposits, term deposits and fixed-income products. And in this country, savers outnumber mortgage holders.
First, I've been writing for a while now that Australians should be more focused on government and corporate bonds as a form of investment, because their risk-return profile is actually more attractive to most amateur retirees than shares or property. So it's interesting that although most people invested in cash may take a hit from this rate cut, those who held 10-year Aussie government bonds before the rate cut are going to end up with a 12-month gain of about 20 per cent. They will have this windfall because of the capital gain that arises because market interest rates have fallen (and therefore the value of their bonds has risen).
However, those focused on cash have some thinking to do, especially if we have a minor recession this year and the Reserve Bank cuts the cash rate again to stimulate economic activity. The banks are adjusting down their mortgage rates (which will take effect over the next few weeks), and pushing down cash and term deposit rates, which will happen immediately.
So this is a time for researching the market, becoming informed and being clear about getting the best deal for your money.
For those in retirement or close to it, shares and property carry liquidity and market risk that they'd rather not take on.
For this large cohort, the choices come down to putting their money in a transaction account, a designated high-interest savings account or a term deposit (TD).
Let's start with the last one. As the banks cut their deposit rates, you'll notice more movement in some types of term deposit than others.
The average 12-month TD rate at banks will drop to about 5.25 per cent and the 30- and 60-day TD rates will, on average, drop to about 5 per cent or less.
Right now the sweet spot is going to be the 90- and 180-day term deposits, which will settle to about 5.3 per cent to 5.5 per cent in the next two weeks.
Why the discrepancy between the 30-day, six-month and 12-month TD rates? Probably because the banks have to satisfy certain funding requirements with their regulator and, while they are flush with short-term funds and long-term funding of three years or more, they have a "hole" in the intermediate funding of 90 and 180 days. So they will bid for your money by making offers on 90- and 180-day term deposits as attractive as they can so you deposit with their bank and not another.
However, it's always worth looking around for alternative deposit opportunities. Your goal should be to have a spread of investments to diversify your risk.
If you're not comfortable with shutting your money away for a set term, you'll either be looking at keeping your money in a transaction account, where you normally get no interest, or an online savings account, where the 12-month average return is about 4.5 per cent and perhaps more than 5 per cent if you're lucky.
I make two points about these options. First, earning no interest in a transaction account is not a smart choice because, with inflation running about 2.5 per cent, a zero interest rate means that you are going backwards.
Second, when investigating the "bonus interest" offers at the online savings accounts, beware what is being promised.
When the institution offers you between 5.5 per cent and 6 per cent, the fine print is pertinent: it will tell you that this rate often only applies for three or four months, at which point the rate drops big time to about 4.5 per cent. Your real rate over 12 months is nowhere near what was advertised and you can only do it once - the bonus rate applies only to new accounts.
There are going to be some good deals out there in the next month. Your job is to be informed not only about the market, but also about your own needs.
Follow Mark on Twitter at @markbouris.
Frequently Asked Questions about this Article…
What did the recent 0.5% interest rate cut mean for savers and mortgage holders?
The Reserve Bank cut the cash rate by 0.5 percentage points to 3.75%. That’s good news for mortgage holders because borrowing costs fall, but it means less income for savers who rely on cash deposits, term deposits and other fixed‑income products.
How are bank term deposit rates likely to change after the cash rate cut?
Banks are already pushing deposit rates down. The article estimates the average 12‑month term deposit (TD) rate will fall to about 5.25%, 30‑ and 60‑day TDs to around 5% or less, while 90‑ and 180‑day TDs are likely to be the sweet spot at roughly 5.3%–5.5% in the next couple of weeks.
Should retirees consider government and corporate bonds after the rate cut?
The article suggests retirees and near‑retirees should look more closely at government and corporate bonds. Bonds can offer an attractive risk‑return profile compared with shares or property for many amateur retirees — for example, holders of 10‑year Australian government bonds before the cut earned a capital gain of about 20% over 12 months as yields fell.
Are online savings accounts a good alternative to term deposits right now?
Online savings accounts can be a reasonable option: the 12‑month average return is about 4.5% and sometimes above 5% if you find a good deal. But watch the fine print on bonus interest offers — advertised rates of 5.5%–6% often apply only for three or four months and typically only to new accounts, so the real 12‑month return can be much lower.
Is it safe to keep my savings in a transaction account after the rate cut?
Most transaction accounts pay little or no interest, and with inflation running at about 2.5% that means a zero interest rate is effectively a loss in real terms. The article advises against leaving money idle in a no‑interest transaction account if you want to preserve purchasing power.
Why might 90‑ and 180‑day term deposits offer better rates than 30‑ or 12‑month terms?
Banks are currently well funded at very short and long maturities but have a gap in intermediate funding (90–180 days). To attract that supply, they may bid more aggressively for deposits at those intermediate terms, making 90‑ and 180‑day TDs relatively more attractive.
What practical steps should everyday investors take after the rate cut?
Now is a time to research the market, compare offers and be clear about your own needs. The article recommends shopping around for the best deposit rates, considering a spread of investments to diversify risk, and thinking about bonds if you want lower liquidity and market risk than shares or property.
How could a future RBA cut or a minor recession affect savers and deposit rates?
If there’s a minor recession and the Reserve Bank cuts the cash rate again to stimulate activity, banks will likely reduce mortgage rates over the coming weeks and push down cash and term deposit rates immediately — which would further lower income for savers relying on deposit products.
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