Savings accounts finally beat inflation as cheap money era ends

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Interest rates are breaking through a key barrier: it’s now possible to make returns that are slightly above inflation simply by putting your money in the bank.

Until recently, holding money in a “high interest” savings account would still leave you with less purchasing power over time, because rampant inflation was gobbling up any interest you earned, plus a bit more. It meant savers were getting a negative “real” or after-inflation interest rate.

It is now possible to get a return from savings that is slightly higher than inflation.Credit: Josh Robenstone

But after the rise in interest rates, most recently this week’s, there are more savings account interest rates starting with a 5, and some of the most competitive offers are a tad higher than the latest annual inflation rate of 5.4 per cent.

Is this a sign of things returning to normal in the financial world? Or is it an illustration of how moving interest rates (monetary policy) creates arbitrary winners and losers across the community? I’d say it’s both.

In one sense, the fact savers can now get 5 per cent returns by taking no risk (bank deposits are government guaranteed) shows how much things have changed since the era of ultra-cheap money.

When interest rates were near zero, it caused all sorts of weird outcomes, such as investors signing up for negative yields on bonds, or rushing like mad to invest in loss-making start-ups. Savers are also meant to get some sort of reward for putting their cash in the bank so that money can be lent out to someone else: it doesn’t make sense for savers to go backwards.

The fact savers can now get 5 per cent returns by taking no risk … shows how much things have changed since the era of ultra-cheap money.

But in another sense, this good news for savers is another reminder of monetary policy’s ability to redistribute wealth from some groups to others. While recent home buyers with big mortgages face hefty increases in their loan repayments, those with large savings balances (who are generally older, and often retirees) are now benefiting from higher income.

The interest rates banks pay on savings accounts tend to get far less scrutiny than mortgage rates, even though there are far more savers than mortgagees in the community.

This is partly because the value of Australian mortgages, at $2.1 trillion, is far greater than the $1.4 trillion in household bank deposits. That means the pain inflicted on mortgaged households from a rate rise is greater than the benefit savers get when their savings rates increase.

All the same, what happens to deposits is another channel through which monetary policy affects households and the economy more generally. Lately, some of these effects are becoming more pronounced.

Some banks outside the big four, such as Macquarie Group or ING, are offering maximum savings rates of about 5.5 per cent, which is higher than the rate of inflation. Macquarie’s rate only lasts four months, ING’s has various eligibility criteria, and the big four banks are offering less because they don’t have to work as hard to attract money.

But even so, the fact some savings accounts are now beating inflation is a turning point. The average “bonus” rates advertised by banks have been lower than the monthly inflation rate since late 2019, Reserve Bank figures show, but now that gap is closing.

As inflation continues to fall, as it’s widely expected to, the real interest rates on savings accounts should improve further.

Now, this doesn’t mean banks have been particularly generous to savers. In August, the Reserve Bank said the average deposit rate had risen by only 2.4 percentage points since it started lifting rates in May last year – well below a 4.1 percentage point rise in official rates in that period.

As always with banking, deposits are priced in a way that penalises inertia. Getting the most competitive savings rates requires a willingness to shop around, and a certain amount of jumping through hoops. You may need to make a regular contribution to your account, make a certain number of transactions each month, or make sure the balance is growing each month.

The Australian Competition and Consumer Commission has been looking into all of these tactics used by banks as part of an inquiry into the deposit market – its final report is due with Treasurer Jim Chalmers by the start of December. It seems likely the watchdog will emphasise the importance of savers hunting around to get a better deal.

But even if the banks have dragged their feet in passing on rate rises to savers, lately bankers have been forced to compete a bit more fiercely for household deposits because of a change in household behaviour: more people have been moving money into high-interest accounts.

When rates were moving from near zero to say 0.5 per cent, there wasn’t much to be gained by putting your money in a higher interest savings account. But for a 5 per cent return, it may well be worth jumping through the various hoops required to get the banks’ “bonus” rates.

Major banks have seen billions of dollars shift from transaction accounts paying zero interest into higher-interest accounts, and they’ve had little choice but to respond by paying more for this money.

For savers such as retirees, the rise in savings interest rates should ultimately mean there is less pressure to go on a “hunt for yield” and chase higher returns through riskier investments such as shares.

This is good news for savers, and a sign that financial settings are gradually heading back to something more normal. Near zero interest rates had all sorts of damaging side effects: they fuelled speculative bets on high-risk assets such as cryptocurrencies, they helped drive a surge in housing lending, and they meant savers were effectively going backwards.

The fact savers can now beat inflation (slightly) is a sign that the weird world of ultra-cheap money is a long way in the past, and we are unlikely to return there soon.

Ross Gittins is on leave.

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