Have we reached a crucial inflexion point in the battle between savers and borrowers?
It is a live question because for the first time in a very long time we are starting to see interest rates on housing loans and on deposits start to rise.
Indeed, it was way back on 3 November 2010 that the Reserve Bank of Australia last raised official interest rates – in that case from 0.25% to the princely rate of 4.75%.
Since then, it has all been one way traffic, with official rates falling all of the way to their current levels of just 0.1% – a level that the RBA has vowed will not be raised until 2024 at the earliest.
The ‘good old days’ when RBA cash rate was 17.5%
The continuing fall in official interest rates arguably goes back much further, if you ignore the occasional tick upwards, with the heroic target of 17.5% set by the RBA on 23 January 1990.
So long and enduring has the trend of falling interest rates been, that many workers and particularly millennials have had no real experience of what happens when interest rates rise.
That may all be about to change with the first inkling that interest rates are turning upwards.
While the RBA sets official rates or effectively a cash rate target, far more important is the actual rate that people pay, which is still set in a competitive market.
Competitive pressures pushing actual rates higher
That competitive market has been distorted quite dramatically by the RBA’s $200 billion emergency funding scheme which was designed to soften the blow from the COVID-19 pandemic.
It was effectively this facility that led to the widespread offer of four and five-year fixed rate housing loans of below 2% – loans which have gradually disappeared as the RBA’s Term Funding Facility (TFF) nears its end this month.
Just as those loans are drying up – although shorter fixed term and floating housing loans remain available with very low rates – some financial institutions are beginning to offer higher deposit rates.
A range of term deposits offered by institutions including Suncorp and Summerland Credit Union have increased their longer-term deposit rates, with more deposit rate rises likely as banks adjust to having to finance more of their mortgage books out of funds they raise rather than relying on the TFF.
Judo Bank is even offering five-year term deposits with an interest rate of 1.5%, paid monthly.
Normally, banks and other lenders would raise around $100 billion a year in wholesale funding from foreign and local investors but this year that has been reduced to just $20 billion from the local and international market.
So even if the RBA sticks to its current plan to hold the cash rate steady for another three or more years, the actual rates people pay on mortgages and savings accounts could rise gently over that time.
Inflation is the secret enemy of savers
Even if the cycle has turned and rates continue to rise, there is no guarantee that the picture for savers will become much brighter.
It all depends on the hidden cost on the purchasing power of all savers – inflation.
If inflation is also on the rise – which the RBA is hoping, at least in a modest way – then not even rising deposit rates will be enough to compensate for the loss of purchasing power over time.
The RBA target for inflation is between 2-3%, so anything within that range will automatically more than cancel out the interest paid.
So, using savings alone as a store of value into the future is a dangerous game, even though saving is meant to be a “safe” option, it should not be an automatic choice over the long term.
As anyone who has watched property or share prices over the past few years, balancing investments across a range of asset classes is essential even for conservative investors if they want to maintain the purchasing value of their investments.
That is likely to remain the case even if interest rates and inflation rise higher over the coming years.