Australia's current period of low interest rates has been a boon for home buyers and anyone paying off loans on low rate credit cards. For people with out a mortgage, however, a low cash rate might not be something to celebrate.
RateCity research has found that Australian banks have made substantial cuts to interest rates on term deposits over the last year, impacting savers across the country.
"It's less competitive than it was 12 months ago", says Peter Arnold, RateCity's product director. "Savers need to make sure they don't rollover into a lower rate."
"Falling interest rates also have a disproportionate effect on retirees. They tend to bring down the discount rate on benefit payouts in the future, as well as reduce the income earned from savings by self-funded retirees," he says.
Which terms have seen the biggest cuts?
Three-month term deposits have seen the biggest drop in interest rates, falling 14 basis points on average from June to November, RateCity figures showed. While nearly all big four banks had rates well over three percent in June, these were now for the most part sitting at 2.9 percent. Only Westpac bucked this trend, with an even lower value of 2.5 percent.
Six-month term deposits saw a similar trend, dropping by 11 basis points during the same period. Twelve-month interest rates, meanwhile, fell ten basis points to a market average of 3.4 percent. The big four has interest rates at 3.2 percent or more for this term deposit type — the only term for which the big four has kept rates over three percent.
This is sure to facilitate the continuing shift away from term deposits by consumers, as they look for another type of high interest savings account with which to help fund their retirement — along with other endeavours.
Roy Morgan Research revealed earlier in the year that term deposits have seen a substantial decrease in popularity in recent times thanks to falling interest rates. Over the 12 months to June, the number of Australians with term deposits fell by 36,000, or two percent of customers.
Low interest rates spark alternative strategies
Philip Lowe, Deputy Governor of the Reserve Bank of Australia, spoke in late October on the effect the current low interest rate environment has on investing.
In a speech delivered at the Commonwealth Bank of Australia's Seventh Annual Australasian Fixed Income Conference, he explained that investors were seeking out "alternatives to bank deposits earning very low or zero rates".
For the most part, he noted, investors hoping to earn a substantial return on their savings — such as retirees-to-be — had been buying existing assets in the hope their price would increase. He urged investors to use their savings to fund the creation of new assets, however, which would help spur economic growth.
This may not be an option for everyone with a savings account, but it may be something to consider going forward.