On July 2, the Reserve Bank of Australia (RBA) cut the official cash rate to an historic low of just 1%, It followed a cut in June, which was the first movement in almost three years. Financial institutions use the cash rate as a guide to set the interest rates that apply to many of their products. More than three million households, or one-in-three, are fully or partially dependant on income from their savings accounts, according to Digital Finance Analytics.
Many banks passed on the latest cut to variable home loan customers, some within minutes of the RBA’s announcement, which has subsequently seen some rates fall to as low as 2.89% (comparison rate 2.89%), the lowest variable home loan rate Canstar has seen in its 26 years of recording data.
However, in many cases the cuts were also passed on to customers hoping to gain financial returns by depositing funds into a bank.
Effective 12 July, ANZ cut its savings account product interest rates by between 0.10 percentage points and 0.25 percentage points. The bank’s savings accounts which earn interest now have rates ranging from 0.1% to 1.95% (Total customer rate for their ANZ Progress Saver, which includes a bonus rate).
Likewise, NAB cut its interest rates on savings accounts by 0.19 percentage points, also effective 12 July. Their savings account interest rates now range between 0.10% and 2.11%.
The cuts follow on from reductions by a range of smaller institutions, including Suncorp, which dropped its savings account rates by up to 0.25 percentage points on July 12.
ING reduced savings account interest rates by up to 0.25 percentage points on July 8. Beyond Bank also reduced its savings products by up to 0.25 percentage points and Teachers Mutual Bank cut by up to 0.26 percentage points last week.
Will savings account interest rates be cut further?
Canstar finance expert Steve Mickenbecker said all four of the major banks reduced their online savings rates to 0.30% in the aftermath of the June cash rate cut.
He said these recent reductions were a sign that there was a “high risk” of the big four banks – NAB, Commonwealth Bank, ANZ and Westpac – eventually applying a 0% interest rate to savings accounts.
“The inevitable happened: The July cash rate cut has been passed through to savings accounts,” Mr Mickenbecker said.
“Australian savers are now staring down the barrel at zero interest rates.
“All four of the major banks reduced their online savings rates to 0.30% in the aftermath of the June cash rate cut. There’s now an expectation that the other two banks will follow ANZ and NAB’s lead with similar cuts.”
However, Mr Mickenbecker said he didn’t expect the big four to go to 0% territory until after the next RBA cash rate cut, if there was one.
“There are still rates to be found from other financial institutions of around 2%,” he said.
“Going to zero straight away would, perhaps, be too big a wake-up call to customers while there were competitors still prepared to offer competitive rates at that level.”
What can you do to protect your savings against interest rate cuts?
Mr Mickenbecker said consumers should act now to try and shore up their savings, and that included “looking at options beyond the obvious”.
“The number one thing to do would be to make sure you are getting the best rates available,” he said.
“If you check the Canstar savings account comparison tool, you can see that it is possible to achieve close to a 2% base rate on some savings accounts.
“The alternative is to go for a term deposit account, where there are rates on the Canstar database of up to 2.5% for a one-year term (based on a deposit amount of $25,000).
“It’s a case of making sure that you are getting as good a rate as you can possibly achieve at this moment.”
The Canstar database also shows that there are accounts that have an interest rate of 2.75% total interest for a comparable deposit amount of $20,000-$30,000 (excluding promotional-only interest rates).
Who is most affected by low savings account interest rates?
He said the move would likely result in even more people considering taking their funds out of the bank, and putting them into other investment vehicles which may offer better returns over the long-term, such as the stock market, but which involved greater risk.
“People are already doing this – self-funded retirees are already taking their money out of the bank and trying to preserve their capital,” Mr Mickenbecker said.
He said there was evidence that people were turning to buying bank shares and other high dividend stocks, such as in retail, resource companies or utilities.
“Those retirees who are particularly vulnerable to a low-rate environment are those who are at a stage in their life where they feel they can’t risk a loss of capital, which can occur in the share market. They probably feel locked in by the banks’ savings interest rates,” he said.
What are the “big four” banks’ rates?
There are many different types of savings accounts offered by banks, but they typically fall into two major groups:
Flexible savings accounts: No time limit funds have to be in the account (as is the case for fixed-term savings accounts); no conditions need to be met to receive extra “bonus” interest to the advertised base rate. They can have promotional interest, which is an interest rate that is only offered during a specified promotional period. When the promotional period ends, the interest rate will generally revert to the base rate.
Bonus savings accounts: Give bonus interest when the account holder satisfies certain conditions, such as depositing a certain amount of money into the account and making no withdrawals over a certain time.
|Flexible Savings Accounts from the Major Banks|
|Bank||Account||Base Rate||Promotional Rate||Promotional Period||Total Rate (*1)|
|Commonwealth Bank||NetBank Saver||0.30%||1.90%||5 months||2.20%|
|ANZ||Online Saver||0.15%||1.80%||3 months||1.95%|
|Source: Canstar – Rates current as at 15/07/2019. Based on all flexible savings accounts available from ANZ, Commonwealth Bank, NAB & Westpac, for a deposit amount of $10,000. Flexible savings accounts are those with no conditional bonus rate. Products in descending order by total rate. *1. Total Rate includes base rate plus any applicable promotional rate.|
The below accounts require savers to meet bonus conditions in order to secure the higher rate.
|Bonus Savings Accounts from the Major Banks|
|Bank||Account||Base Rate||Bonus Rate||Bonus Rate Conditions||Total Rate (*1)|
|Westpac||Life||0.80%||1.30%||Make at least one deposit and ensure account balance is higher at the end of each calendar month than at the beginning.||2.10%|
|ANZ||Progress Saver||0.01%||1.94%||Make at least one deposit of $10 or more and no withdrawals each calendar month.||1.95%|
|NAB||Reward Saver||0.11%||1.75%||Make at least one deposit and no withdrawals each calendar month.||1.86%|
|Commonwealth Bank||GoalSaver||0.01%||1.39%||Deposit at least $200 & make no withdrawals each calendar month.||1.40%|
|Source: Canstar – Rates current as at 12/07/2019. Based on all bonus savings accounts available from ANZ, Commonwealth Bank, NAB & Westpac; for the deposit amount of $10,000. Bonus savings accounts include those that earn bonus interest when certain conditions are met. Products in descending order by total rate. *1. Total Rate includes base rate plus any applicable bonus rate.|