Interest rates on deposits have dropped again and the short-term outlook is ‘bleak’.
There’s a war of sorts going on in the financial services sector – and retirees and savers are among the casualties.
As Treasurer Josh Frydenberg confirmed today that we are officially in a recession and the Reserve Bank, as expected, kept the official interest rate on hold at 0.25 per cent, the outlook for retirees is a challenging one.
The banks are in a position of power on savings and term deposit interest rates and there appears to be little prospect of an improvement for several years, according to financial services specialists.
The problem is that bucketloads of money have been dumped into bank coffers – even though the best interest rates on offer are less than 2 per cent.
The Australian Prudential Regulation Authority (APRA) says we plunged more than $15 billion into bank accounts in April, as more than $14 billion in withdrawals were made under the government’s early super access scheme.
“The [banks’] demand for deposits is lessened, so therefore it’s very hard to get a decent rate of return on whatever savings you have,” RateCity.com.au research director Sally Tindall told The New Daily.
She described the short-term outlook for savers as bleak, as the RBA has ruled out hiking rates for “some years”, but urged customers to shop around because “there are still some semi-decent ongoing rates out there which could suit pensioners whose personal finances are structured differently.”
Comparison website Canstar says nine providers have slashed rates on savings accounts, while new home loan customers benefitted from 36 cuts to variable rates in May.
The problem is that banks are more hungry for borrowers than for savers.
Canstar financial services executive Steve Mickenbecker explains that the leading banks have had to respond to competition in the home loan market, with several non-major lenders offering variable rates below any major provider. This forces lenders to cut rates for deposits, he told The New Daily.
“Three of the four major banks have lost [home loan] market share over the last 12 months, and they absolutely would want to claw it back,” he says.
“The banks make money by lending and they fund their lending with deposits and wholesale funding, so if wholesale rates keep falling (currently 0.16 per cent for 180-day money), they can say the market interest rates have fallen, therefore they can fund part of their book with cheap wholesale money.”
There is some good news however.
Mr Mickenbecker says that banks need to maintain their deposit rates to avoid being downgraded by credit agencies, which may rule out plans for any future cuts.
He also believes that rates across the board may have already bottomed out.
“I don’t see that the banks can actually pass on much in the way of further cuts to home loans or deposit rates,” he said.
In other news that gives cause for optimism, the ANZ-Roy Morgan Australian Consumer Confidence rating rose 6 per cent to 98.3 in the week to 31 May. It found:
- Now 24 per cent (up 1 percentage point) of Australians say their families are ‘better off’ financially than this time last year and 36 per cent (unchanged) say their families are ‘worse off’ financially.
- 38 per cent (unchanged) expect their family to be ‘better off’ financially this time next year compared to 17 per cent (unchanged) that expect to be ‘worse off’ financially.
- Just 10 per cent (up 4ppts) expect ‘good times’ for the Australian economy over the next 12 months while 42 per cent (down 6ppts) expect ‘bad times’.
- In the longer term, 24 per cent (up 4ppts) of Australians are expecting ‘good times’ for the economy over the next five years compared to 17 per cent (down 3ppts) expecting ‘bad times’.
ANZ head of Australian economics David Plank says: “On the back of strong gains in the ‘economic conditions’ subindices, confidence strengthened further last week. Nine weekly gains in a row is unprecedented.
“To be fair, though, so was the depth of the starting point.
“More good news about control of the pandemic and the consequent relaxation of restrictions is key to the lift in sentiment. Expectations of residential housing stimulus and lower petrol prices may also be playing a role. Though lower petrol prices are also contributing to the record low in inflation expectations.”
Reserve Bank governor Philip Lowe also gave a cautiously positive outlook.
“It is possible the depth of the downturn will be less than earlier expected,” he said in a statement. “The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely.
“There are signs that hours worked stabilised in early May, after the earlier very sharp decline. There has also been a pick-up in some forms of consumer spending.”
Mr Frydenberg was of a similar mind, saying that despite the grim outlook, Australia was on track for a stronger recovery than other OECD nations.
“The fact that the Australian economy only contracted by 0.3 per cent shows the Australian economy’s remarkable resilience,” he said.
“Indeed, Australia’s performance in the March quarter compares very well to that seen in other nations, with negative growth of 9.8 per cent in China, 5.3 per cent in France, 2.2 per cent in Germany, 2 per cent in the United Kingdom, and 1.3 per cent in the United States.”
Have you settled in for the long haul? Have you revised your retirement plans?
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