The RBA cut interest rates. That’s not great for your cash balance. Here’s what you need to do

Reserve Bank interest rate cuts are denting the incomes of savers, but there are ways to minimise the losses. Here’s how to invest cash and what a decent term deposit rate looks like now.

The Reserve Bank of Australia’s dovish tone has set the scene for several rate cuts this year, prompting investment specialists to advise people to reconsider their cash strategies.

Tuesday’s Reserve Bank rate cut of 0.25 percentage points came with multiple RBA warnings about ongoing global uncertainty, prompting financial markets and economists to forecast another two or three cuts this year.

While its a relief for mortgage holders, those enjoying returns on cash are considering what strategies may deliver better returns.

Some investment specialists say it’s worth shifting some money from cash to bonds, private credit, infrastructure and shares.

People who prefer guaranteed money in the bank still have options. Research group Canstar says it starts with knowing what a good savings rate is today.

Canstar data insights director Sally Tindall said people seeking a good return right now should target 4.75 per cent, although this would fall after more RBA rate cuts.

“There are currently 12 banks offering at least one savings account with a maximum ongoing rate of 5 per cent or more, however, we expect this will drop to around four banks after the May RBA cut filters through, excluding kids’ accounts,” Ms Tindall said.

Term deposit rates

These have fallen below 5 per cent, with the top rate currently 4.75 per cent from Heartland, Canstar’s analysis found. Qudos is offering 4.5 per cent for a one-year term deposit and Judo Bank 4.25 per cent for three years and 4.3 per cent for four years.

Savers should not sit back and do nothing, Ms Tindall said.

“The spectrum of interest rates in the savings market is nothing short of spectacular – with some banks offering rates below 1 per cent, while others are still offering rates at 5 per cent or more,” she said.

Comparison website Mozo’s spokeswoman, Rachel Wastell, said the interest income difference between a big four bank savings account and a market leader could be $177 a year on a $25,000 balance.

“Don’t stick with the same bank out of habit,” she said.

Ms Wastell said people should also understand savings account conditions to ensure they were actually receiving the advertised rate.

“There’s definitely still value out there, but now savers have to work for it,” she said.

Ms Wastell noted that there had been more than 650 term deposit rate cuts this year, with the biggest monthly drop in April.

“Lock it in while you still can,” she said. “The window for high term deposit rates is closing fast. Even a 4.5 per cent rate today could look generous in a year’s time.”

Falling rates on deposits took longer than expected to arrive, largely because households were resilient amid 13 rate rises in 2022 and 2023. During 2023 many forecasters tipped multiple cuts in 2024, but none eventuated.

Ms Wastell said the delay most benefited people who “moved while the market was hot”.

“Now it’s about being smart with what’s left on the table,” she said.

Fixed income assests

Vado Private head of funds management Mark Zukerman said interest rates on term deposits averaged 3.1 per cent across all maturities last month.

“That exposes many savers to very low returns, potentially falling below zero given inflation of 2.4 per cent,” he said.

Savers are tipped to suffer from more interest rate cuts later this year. Picture: iStock

Tax takes a chunk out of savers’ interest income, which does not come with franking credits like shares.

“In an environment where consumer price inflation could reignite given Trump’s tariffs, investors would be wise to reassess high allocations to cash and look elsewhere,” Mr Zukerman said.

“For a little bit more risk, retail and retirement investors can gain much higher returns by allocating more to fixed income assets, which are typically defensive investments.”

Canstar’s Ms Tindall said it was worth considering putting eggs “in a variety of baskets”.

She said some people would seek higher-risk investments, but should do their research and understand returns were not guaranteed. “Make sure your strategy suits your financial goals and your life cycle – you are not going to put everything into a higher-risk strategy on the share market if you’re nearing retirement and are going to need that money soon.”

Originally published as The RBA cut interest rates. That’s not great for your cash balance. Here’s what you need to do