Speculation is building that the Reserve Bank of Australia (RBA) may soon cut the nation’s cash rate for the first time in years. While many home owners and property investors may welcome this news, what effect would a rate cut have on Australians keeping their wealth in savings accounts or term deposits?
What is the cash rate?
The cash rate is the rate at which interest is charged on overnight loans between banks in Australia. Because banks use these overnight loans to provide money and services to their customers, the cash rate directly affects their cost of doing business.
Because the cash rate serves as something of a de-facto benchmark for interest rates around Australia, the RBA’s meetings to decide the cash rate’s future often attract a great deal of interest.
What does the cash rate mean for interest rates?
While there are many different factors that affect bank interest rates, it’s common for Australia’s cash rate to impact them significantly. When the RBA cuts the cash rate, sooner or later most banks will pass this cut on by slashing their own interest rates. And if the RBA raises the cash rate, banks will often follow suit with a rate hike in the future.
Australians with mortgages, personal loans or car loans often welcome cash rate cuts, as these often mean paying less interest on loans when the bank passes on the rate cut. On the other hand, increases to the cash rate can push interest rates higher, making interest charges on loan repayments cost more.
However, low interest rates aren’t always welcomed by everybody. The cash rate not only affects the interest rates that banks charge on loans, but also the interest rates that banks offer on savings accounts and term deposits. A rate cut could mean many Australians earn less interest from their savings, and grow their wealth more slowly.
How could a rate cut affect term deposits?
A term deposit is an agreement to deposit a sum on money in a bank for a predetermined length of time, earning you interest on these savings. Generally, the more money you agree to deposit, and the longer the term you agree to save it for, the higher the rate of interest you can earn.
If you currently have money saved in a term deposit, very little should immediately change for you if the RBA cuts rates. Term deposits have fixed interest rates – the interest rate you sign up for at the start of the term will still be the same at the end of the term, no matter what the RBA or your bank does.
That said, if you choose to roll over your deposit once its term comes to an end, you may not get the same interest rate a second time if your lender has changed its rates in the interim. If your term deposit’s rollover date is coming up, it may be worth checking what rates your bank is currently offering, and comparing these to options from other financial providers.
How could a rate cut affect savings accounts?
Keeping your money in a savings account is a relatively simple way to slowly grow your wealth. Savings accounts allow you to earn interest on the money you deposit, with some saving accounts offering higher bonus interest rates to people who fulfil certain terms and conditions, such as regularly topping up their accounts with additional savings.
If you currently have money in a savings account, things could change for you if the RBA cuts the cash rate. It’s possible that your bank may pass on this cut and reduce its variable interest rates, including the earn rates on its savings accounts. Depending on your circumstances, this could lead to you earning less interest on your savings and growing your wealth more slowly.
If you’re not sure whether your bank will be changing its interest rates, contact them to find out. Comparing alternative savings account offers from other banks may let you enjoy better rates, lower fees, or more features that suit your needs.