Savers Likely to be Worse Off
As banks start to impose rate cuts, customers would be affected in one way or another. Following the official cash rate cut by the Reserve Bank of Australia (RBA), banks have started to pass on the cut to their mortgage loan rates. However, the ripple effect does not stop there; few banks have started cutting ‘at-call’ cash accounts.
In particular, savers and retirees that rely on the interest income would be the primary target. Analysis indicated that these people will collectively lose $1.3 billion if banks pass on the full 25 basis points cut to all savings account rate. According to the Australian Financial Review, around 80% of savings accounts and 44% of term deposits are earning a negative return, after factoring in the cost of inflation.
In a historically low-interest rate environment, the record low rates will force savers to invest in riskier assets to keep up with inflation costs. Many would turn to investments ranging from properties to equities, which would yield higher returns in exchange for greater uncertainties.
During RBA Governor Philip Lowe’s speech, he had considered the assumptions and believed the “cash rate would follow the path implied by market pricing,” and foreshadowed a further rate cut later in the year. A further rate cut would devastate the savers as they are already faced with record low savings rates.
Mortgage loan rate cut
Earlier in May, the RBA came to the decision to cut interest rates by 25 basis points to 1.25%, after holding the rate unchanged since September 2016. In light of recent global news, Australian economic growth has softened. The Board believed that this decision will “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.” In announcing the rate cut, Governor Lowe stated that the “reduction in the cash rate should be fully passed through to variable mortgage rates.”
Following the rate cut, the big banks had passed on the cut on their mortgage loan rates ranging from 18 basis points to the full 25 basis points. Other banks have started to follow the trend, with most lenders passing on the full cut, outnumbering those who did not. These cuts on the variable home loan market are largely benefiting the borrowers. It is clear that the RBA wanted to encourage and stimulate investment in the economy.
Implication of a cash rate cut
While a reduction in the mortgage loan rates is good news for borrowers, savers are likely to be worse off. Analyst Graham Cooke said the “average online savings account rate has followed the cash rate when it has moved 99% of the time since 1990, so cuts of some degree are almost guaranteed.”
According to data, Australians have around $526 billion in at-call cash accounts. If on average, all banks were to pass on a 25 basis points rate cut; this would be equivalent to a loss of $1.3 billion for the savers. Governor Lowe was aware that savers would be “disappointed” with the rate cut, but indicated that the lower interest rate “will help the economy as a whole.”
At the moment, the big four banks have yet to pass on the interest rate cut to at-call deposit accounts. However, Mr Cooke said it was “inevitable” that the big banks would “soon follow suit.” Data from Canstar, a financial comparison site, showed that AMP had cut the interest rate on the savings account by 25 basis points to 1.85%. Suncorp reduced two of its savings rate by 30 basis points and 25 basis points to 1.10% and 1.15% respectively. Other banks had also followed the cut.
Of the big four banks, ANZ appeared to have one of the best savings offer, providing a total of 2.4% with its Progress Saver account. According to RateCity, NAB offers the best at-call cash rate among the big banks. The bank offers a base rate of 0.5% and 1.8% bonus rate in its Reward Saver account, bringing the total rate to 2.3%.
ANZ’s public scandal
Last week, ANZ CEO Shayne Elliott defied the RBA’s expectation to pass on the full rate cut, by holding back seven basis point. Mr Elliott emphasized the need to balance the interests of all stakeholders, and said that “these people have done it tough and we don’t want to keep hammering them.”
The bank chief’s decision was met with widespread criticism. Treasurer Josh Frydenberg was deeply disappointed by the bank’s decision. Following public pressure, ANZ was forced raised its 11-month term deposit by 80 basis points in damage control.
In an interesting twist, ANZ had cut the rates on a range of deposits by at least 25 basis points prior to the RBA’s rate cut. While ANZ has not officially announced to pass on the rate cut to the savings account, spokespeople for the bank mentioned they were under review.
Many have speculated whether another rate cut by the RBA will be in effect before the end of 2019. However, the market has likely predicted another rate cut, which would make the savers even worse off.
By Jack Lee
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