Short-term deposit holders could be waiting a long time for banks to pay higher interest rates on their savings thanks to the climbing Aussie dollar, a leading economist told YourLifeChoices.
AMP Capital Head of Investment Strategy and Chief Economist Dr Shane Oliver said “any increase in central bank interest rates and thus interest paid on term deposits will be a very slow process”.
Dr Oliver is tipping the Reserve Bank of Australia (RBA) will not put up its cash rate until the last quarter of 2018.
Other analysts are more optimistic that rates will start climbing before the end of this year or at the latest early next year. But Dr Oliver believes those pundits are not taking the currency factor seriously enough.
The RBA has resisted raising its cash rate of 1.5 per cent for more than a year. But if the Australian dollar keeps strengthening, indications are it will be more determined to keep the rate low or even reduce it to keep a lid on inflation.
“For every 10 per cent rise in the value of the dollar you will see around one per cent knocked off domestic prices as imports become cheaper. This leads to people spending more and that is what fuels inflation,” Dr Oliver explained.
The RBA’s main goal is maintaining inflation within a range of two to three per cent. So far this year it has been around two per cent.
If you have a fixed-interest, short-term deposit paying less than two per cent, inflation is eating away at your savings, Dr Oliver said.
Attempts to rein the dollar back from edging too close to US85 cents means interest rates are probably going to stagnate. Currently, the dollar is wavering slightly either side of US80 cents.
If that the dollar continues to edge up – it was just US77 cents earlier this year – then don’t expect your financial institution to begin offering you a higher rate when you roll over your term deposit.
This month, the RBA posted a loss of $900 million for the year, compared with a profit of $2.9 billion in the previous 12 months. It blamed the Aussie dollar’s surge for stripping value out of the bank’s foreign assets.
So if you thought you might wait and see if banks offer higher interest payouts on the back of speculation that the RBA will move its rate higher, you will also need to consider how the currency is tracking.
In the meantime, it’s worth comparing the interest rates on different term deposits to make sure your savings are growing rather than receding.
Is your nest-egg staying ahead of inflation? Should banks pay higher interest on term deposits?