Interest rates: Won't someone think of the savers?

Thursday, 9 May 2019

If you're someone with money in the bank, you probably find it hard to join in the celebration of a round of interest rate cuts.

When the official cash rate was cut this week to another record low, banks responded by passing on some of the reduction to their home loan customers.

The problem is, they also reduced what they paid on a range of their savings products, too.

ANZ said it would cut its 90-day term deposit by 15 basis points, and its 60- and 120-day term deposits by 25 basis points.

* Reserve Bank cuts official cash rate to all time low, banks cut mortgage interest rates

* NZ bank says high credit card rates 'area of customer harm', wants investigation**

Kiwibank's variable rate deposit products, Notice Saver and Online Call, also decreased by 15 basis points.

Westpac reduced its 90-day and four-month rates by 15 basis points. Its five-month term was cut by 20 basis points and term deposits between six and nine months dropped by 10 basis points.

Its savings accounts were also affected.

Chris Tennent-Brown, wealth economist at ASB, said it was important for investors relying on term deposits to get an understanding of what might lie ahead for those interest rates.

'We expect the Reserve Bank keep the official cash rate very low over the next few years.'

ASB predicts another cash rate cut later in the year.

'Related to this, we think the popular term deposit rates of up to one year are likely to stay low, too, because they are heavily influenced by the Reserve Bank's OCR setting. The risk is they dip lower.'

He said higher returns were possible through longer-term investments.

Savers could get an extra 70 basis points if they committed to a term deposit of six months rather than 90 days.

'Some people should consider diversification into different assets with different risk profiles,' he said.

'Term deposit specials are sometimes available when the bank wants to attract funds for a particular term, and are another way of accessing higher returns – rates around 3 per cent to 3.5 per cent might not sound too special to savers who enjoyed higher rates in earlier years, but they need to be considered in the current low inflation-low interest rate environment.'

He said people should also check the tax rate they were paying was right, and talk to an adviser to ensure they were invested in the right assets.

Tom Hartmann, managing editor of Sorted, said people who were in appropriate investments for their risk profile and circumstances should not be concerned by the drop.

Retirement savings should be split into three buckets - cash for immediate needs, investments such as bonds to produce income and growth assets to increase the sum invested and help combat the impact of inflation over time.

Because bank accounts should only be short-term vehicles, a change in the interest rate should have limited impact.

'If it's structured properly you should not be beholden to small changes in the interest rate. It should be organised in a way that mitigates the risk.'

ANZ's managing director of retail and business banking, Antonia Watson, said there would be an effect on some people.

'It's important that people maintain healthy savings, but a lower cash rate will impact on deposit interest rates. We're concerned that savers might seek higher interest rates through riskier investments and savings options.

'Lower deposit interest rates will also be a concern for the elderly who rely on interest income in retirement.'

Anthony Edmonds, founder of managed fund platform InvestNow, also warned against chasing risky investments for the sake of a higher return.

'There's a real danger that yield investors could be lured into much riskier products in exchange for slightly higher interest rates,' Edmonds said.

'For example, there seems to be an increase in products advertising higher yields for investing in local commercial property or New Zealand mortgage funds.'

He said the risks could be higher than investors realised.

'A decade ago lots of Kiwi investors got in trouble by moving into finance companies where they were getting 3 per cent to 4 per cent more than what they could get on their bank term deposit. In the current low interest rate world more risky investments only need to promote a yield of 6 per cent to 7 per cent to attract those chasing income. People need to be careful not to fall into this risky trap.'