It appears interest rates are finally stabilising, but is that actually a good thing? Well, if you’ve got savings sitting in the bank, not so much. But there are steps you can take to secure your money.
After 13 official rate rises in just two years, it finally appears the Reserve Bank of Australia (RBA) has paused its relentless campaign of rate cuts, holding the official rate at 4.35 per cent for February.
While this is good news for anyone with a mortgage, the same can’t be said for those holding cash in the bank.
The current inflationary period has been something of a boon for many older Australians, who are more likely to have paid off their homes in full.
With interest rates rising month after month, it finally became possible to make above-inflation returns simply by leaving you money in a savings account and doing nothing.
But the celebrations were short-lived for savers. Inflation has come down and the RBA seems to have paused its rate rise campaign for now. And interest rates for savers have fallen accordingly.
Can you lock in higher savings rates?
The good news is that yes, you can. By using a term deposit account. These work by locking in a particular interest rate for the saver in exchange for them holding their money in the account for a set period of time.
The obvious benefit to a term deposit is locking in a higher interest rate which will remain even after rates drop, but be aware if you fix your savings rate and then official interest rates go up, you’ll be stuck with the rate you fixed until the end of the term.
To hedge your bets, a potential solution may be to allocate a portion of your savings into a term deposit account and the other in a more open account exposed to rate changes.
There are both long- and short-term deposits available, with longer terms generally attracting a more favourable savings rate.
If you have cash that you don’t need right away, a term deposit is an almost zero-risk way of making money.
Why are rates levelling off now?
The short answer is that the rate rises are cooling because inflation is slowing. The RBA raises official interest rates in order to lift mortgage-holders’ monthly payment, which in turn decreases their discretionary spending power.
With less money to spend, people buy fewer items. Monthly sales figures start to drop, and finally retail prices start to fall in order to boost those figures again. Inflation is cured!
And indeed, it does appear that this current inflationary period is slowing down. The largest indicator of inflation, the Consumer Price Index (CPI), showed that retail prices had only risen 0.6 per cent in the December 2023 quarter, and 4.1 per cent in the previous 12 months.
The RBA’s stated goal is to keep the headline inflation rate to between 2 and 3 per cent, so this result would suggest the interest rate rises have worked.
Have you ever put your money in a term deposit? Did you find it more beneficial than a regular savings account? Let us know in the comments section below.
“but be aware if you fix your savings rate and then official interest rates go up, you’ll be stuck with the rate you fixed until the end of the term”
The above statement is not quite true. When the Government said interest rates would not rise some time ago we locked in a term deposit for 1 year. Within 2 months the interest rates started to rise. So we cancelled the term deposit with minimal cost and put the funds into a savings account with bonus interest for 4 months (Macquarie Bank). At the end of the 4 months and interest rates rising it was moved into a Term Deposit.
So we are now at the other end of the scale with interest rates expected to drop and with two TD maturing in early March they will be deposited for at least 12 months, maybe even longer.