Ironically, at a time when Australians are literally saving money faster than they have for decades, the returns they are getting are absolutely terrible.
It is only a year ago that many bank savings accounts were earning more than 2% – now most of them have fallen to a truly miserable degree.
RateCity research shows that average annual returns on savings accounts are now 0.57%, with the vast majority of accounts now offering below 1%.
There are some promotional offers around that apply for a while and a few term deposits that are a little higher but rates have been falling steadily and with the RBA cash rate down to 0.25% in March and likely to stay there for the foreseeable future, there is little hope that savings interest rates will rise anytime soon.
On the other side of the equation, the latest national accounts show that Australians are so spooked by the COVID-19 recession that they are saving an incredible 19.8% of their income.
That sort of level hasn’t been seen since 1974 and it shows that people are acutely aware of the perils of rising unemployment.
Time to cut expensive debt
So, if we are all saving much more and interest rates on deposits are so low, what is the answer?
Well, the obvious answer is to pay down debt, preferably higher interest consumer debt such as credit cards and overdrafts.
And that is precisely what is happening, with the Commonwealth (ASX: CBA) and ANZ (ASX: ANZ) banks both confirming large falls in high interest rate debt before a recent House of Representatives economics hearing.
CBA chief executive Matt Comyn said there had been a 17% drop in unsecured personal loan debt, while the country’s largest bank had also seen a $2 billion drop in outstanding credit card debt.
ANZ chief executive Shayne Elliott said its customers had wiped $2 billion from the bank’s credit card loan book, saying people have become more prudent during the pandemic.
Frozen loans the other side of saving
The other side of this sensible behaviour is the freezing of home and business loans, with CBA offering deferrals on 250,000 loans with total loan balances above $60 billion.
Mr Elliott said about 84,000 of its home loan customers still had their mortgage repayments on pause, representing almost 10% of the bank’s home lending portfolio.
In many ways the unfreezing or otherwise of these loans will be the litmus test of how quickly or otherwise Australia can emerge from the current recession.
Large numbers of forced sales would threaten the property market and indicate the enduring problem of unemployment while a more orderly escape would show that the recovery is more rapid than expected.
Rates could go lower still
As difficult as it might be to believe, the tiny savings rates on offer could still be better than what is to come.
According to Deutsche Bank, a further cash rate cut is possible from the Reserve Bank of Australia, given its latest monetary policy meeting kept the door open for further easing.
Deutsche expect that the cash rate will be lowered from the current 0.25% to 0.1% by February and that it is possible that the RBA would introduce an expanded bond buying program to be implemented to reduce the interest rates on five to ten-year government bonds.
If Deutsche is right, then term deposit rates could fall even lower in the months to come.