Cash savers celebrate but their money is still going backwards

Inflation will eat away the gains that savers are enjoying from rising interest rates, but cash is appealing when shares sink.

Finally Australia’s long-suffering savers have been given some good news in the form of sharply-rising interest rates.

While mortgage pain dominated the headlines following the Reserve Bank’s 0.5 percentage point June rate rise to 0.85 per cent, Aussies’ bank deposits are set for a boost.

Some banks have gone way above the RBA’s rate moves in an effort to win back disgruntled savers. NAB and Westpac have announced a 12-month term deposit rates of 2.25 per cent, while ING lifted the interest rate on its Savings Maximiser account by 0.75 percentage points to 2.1 per cent.

Macquarie Bank increased interest rates on transaction account deposits to 1.5 per cent, well above the 0 to 0.01 per cent offered by other big financial institutions.

RateCity says it’s proof that competition in the savings sector is back from the dead, and it urges people to shop around for the best rates.

Savings accounts are a huge market that has been forgotten for years. Roughly one-third of households have mortgages, one-third have paid off their home loans and the other third are renting.

That means a majority of the population will benefit from higher deposit interest rates, whether it’s helping to save for a first home, saving for their retirement, or boosting their existing retirement income.

However, it’s worth noting that even with the deposit rate rises of the past week, people’s cash in the bank is still going backwards.

Getting 2 per cent on your deposit feels much nicer than 0 per cent, but official inflation was at 5.1 for the three months to March 31 and is probably 6 or 7 per cent at the moment. So a 2 per cent return is effectively negative 3 per cent or worse after the impact of inflation.

Cash in the bank becomes much safer when stockmarkets are sinking.

Income from bank deposits is taxable too, without the franking credits that come with shares or the negative gearing attached to property investments, so a saver can lose up to half their 2 per cent return in income tax.

While this may make cash deposits sound like a waste of time, they are clear winners when other asset prices are sinking.

Property prices are already falling in most capital cities because of rate rise fears, and the Reserve Bank has predicted home values could tumble 15 per cent.

Australia’s sharemarket has also been shaky, losing 7 per cent of its value since January 1, which is better than the 14 per cent slump in US stocks this year but worse than what investors are earning from cash deposits.

Cash also helps people sleep better at night, without worrying that a big stockmarket collapse is coming soon as recession forecasts multiply around the globe.

It’s much better to get a 2 per cent positive return on your money than a minus 15, 20 or 50 per cent performance – as we saw in the global financial crisis in 2008-09.

Nobody would blame any investor for reducing their share portfolio a little right now to park some cash in the bank, for both diversification and the ability to pounce on discounts if a sharp downturn comes.

However, switching to cash in your superannuation is not generally recommended by experts if you still have more than a decade before using the nest egg in retirement. Super is a long-term asset structure, and trying to time it can be financially dangerous.