All bank savings losing value, except for those of one select group of children

Sunday, 31 January 2021

Only a small number of children are winning out of bank savings.

A small number of children are the only people with savings accounts whose money isn’t losing value.

The vast majority of New Zealand households’ savings in banks, building societies and credit unions are being eroded because inflation is higher than the interest savers are receiving.

Inflation as measured by the Consumer Price Index (CPI) is at 1.4 per cent, but among the hundreds of accounts at banks, building societies and credit unions, the savers in just one were getting interest of 1.4 per cent or more on January 29.

These were the children getting 2 per cent from their Co-operative Bank children's accounts.

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The Co-operative Bank is owned by their savers, and not by shareholders seeking to earn a profit, and chief executive David Cunningham said the bank had long used its children’s accounts as a way of winning young savers who then became customers for life.

There have been fears that New Zealand savers could end up facing negative interest rates, but in real terms that has already happened to most savers, the rates on offer from banks and other financial institutions show.

ANZ was paying just 0.05 per cent on $5000 deposited in its Select savings account.

On transaction accounts interest may be zero, as on ASB’s Unlimited account where anything less than $100,000 on deposit results in no interest being payable.

Banks with lower credit ratings like the Indian Bank of Baroda (BBB-), Bank of India (BB+), and the China Construction Bank (A) pay higher rates of interest on savings accounts, but less than the 1.4 per cent rate of inflation.

Jarrod Kerr, chief economist at Kiwibank, says interest rates on bank accounts will not go into negative territory.

These lower-rated banks also offered more for term deposits, which savers often turn to for higher rates of interest in return for locking their money up for a period of time.

It’s only on longer-duration term deposits of 12 months to five years do interest rates approach 1 per cent at the big banks, and top it at the smaller, higher-risk international banks.

The highest one-year term deposit rates paid for by the smaller banks with a public brand are the 1 per cent from Rabobank, and 1.05 per cent by SBS, both for deposits as low as $1000.

But with inflation on the rise, unemployment holding up well, and the economy remaining relatively strong, interest rates on retail bank accounts were not expected to go negative.

Kiwibank chief economist Jarrod Kerr said: “The chances of the official cash rate (OCR) being cut to negative have been taken off the table given everything that has happened.”

Co-operative Bank's youth account holders appear to be the only people in New Zealand who are getting a positive, after-tax, after-inflation, return on their savings. In real terms, after inflation, everyone else's savings are eroding in value.

But even had the OCR been negative, bank interest rates on savings and term deposits would not dropped below zero.

The OCR was 0.25 per cent, and one-year term deposits had found a floor 50-75 basis points above that, he said.

Internationally, the reaction to ultra-low and negative interest rates on bank accounts has been to encourage people to tighten their belts and save more.

“The academic research has shown in countries like Japan and in parts of Europe that when deposit rates go close to zero a big portion of society don’t have the risk appetite to move into other assets,” Kerr said.

These other assets could include investing in shares, or higher-risk ventures like non-bank finance companies, or property investments.

The international research showed many savers and retirees instead tighten their belts, spend less, and save more, Kerr said.

Households have been in over-all saving mode since the Covid-19 pandemic struck, paying down their consumer debts and adding to their cash savings, data from the Reserve Bank of New Zealand shows.

Between September 2019 and September 2020, households’ consumer debts reduced from $16.7billion to $14.8b, and their combined deposits with at registered banks went up from $183b to $200b.

Cunningham said low interest rates posed a challenge to people who had used interest on deposits to top-up their income in retirement.

Some who needed income would have to start running down their balances, spending some of their capital, he said.

This was not so very different from when interest rates, and inflation were higher, he said, as people spending all the interest income from deposits in higher inflation times were still seeing the value of their capital eroded.

He said this would feel like “spending the kids’ inheritances”, or skiing, as that is sometimes called.

But, he said: “The other logical way of thinking about it is that it was already happening in higher inflation times.”

Some investment experts warn that low interest on deposits can encourage people to take higher risks with their money, sometimes not understanding the risks they were taking.