Savings surge as Aussies face rates retreat with economic blow

Record low interest rates have done little to stop Australians from pouring money into savings.

Record low interest rates have done little to stop Australians from pouring money into savings.

Australian households poured more than $13bn into savings in the 12 months to October 2020 despite record low interest rates as unprecedented support from banks and the government converged.

The newly released data from the Australian Prudential Regulatory Authority shows a 12 per cent surge in savings that have coursed through the financial system on the back of record government assistance and a nation fearful of what comes next.

This mammoth savings injection comes on the back of the cash rate continuing to climb down the stairs from 0.75 per cent in October 2019 to 0.25 per cent in October 2020, before falling even further to 0.1 per cent in November.

Speaking earlier in November Reserve Bank governor Philip Lowe noted how low rates “can encourage some additional risk-taking, as investors search for yield”.

“(The RBA) also recognises that low deposit rates can create difficulties for some people. These issues will need to be closely watched over the months ahead,” Dr Lowe said.

“In terms of interest rates, I think we have gone as far as it makes sense to do so in the current environment. “

The June to July jump saw the greatest savings boost for Australian households, leaping 3 per cent despite the continued downward trajectory of rates of return.

“There has been no change to the Board’s view that there is little to be gained from lowering the policy rate into negative territory,“ Dr Lowe said.

“While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more.”

Overall household deposits grew from $1.03bn in June to $1.06bn in July.

The unprecedented government support in expanded JobSeeker payments, coupled with JobKeeper only added to inflows.

This came after the new financial year opened another opportunity for Australians to take another hit of early access to superannuation on the back of government policy that opened Australian’s accounts in April.

The savings boost also came as the Australian Bureau of Statistics recorded an economic contraction of 7 per cent for the June quarter, the largest quarterly fall on record.

The savings splurge by households was mirrored in overall residential deposits which have exploded by $29bn in the past 12 months, untempered by fires, floods, pandemics, border closures and the sharpest hit to economic activity in Australia ever.

Many Australians took advantage of leniency from the banks to defer loans, stemming many potential outflows from accounts.

APRA data shows loans subject to deferrals peaked in May, at one point representing as many as one in 10 housing loans and three in 20 business loans.

Investors were the greatest users of the loan deferrals, capturing almost 40 per cent of mortgage deferrals.

As of 31 October 88 billion in loans remains on temporary deferral, around 3.3 per cent of total outstanding loans.