Central Banks Screw Savers
We are three rate cuts deep this year…
Aussies now find themselves with a cash rate of just 0.75%.
The Reserve Bank of Australia continues to desperately lower rates to stimulate growth, stave off recession, or make sure the Aussie dollar stays weaker than the greenback.
The problem is, while the central bank pulls this lever, or moves that thingy, it’s crushing a whole bunch of people in the process…
Because not all bank customers are debtors…
Government bullies banks
The recent rate cuts have created a clear divide between the RBA and the banks.
The Big Four aren’t passing the rate cuts on in full to customers…and the government is pressuring them to do so.
Which is wrong.
Treasurer Josh Frydenberg should never have slammed the banks about their rate decisions.
At best, it makes him look ignorant of how banks raise funds. At worst, it’s an abuse of government power to bully the banks about the rates they set.
Banks should set their interest rates based on the demand for money and their own funding costs — independent of central banks and governments.
However, there is a flip side to this.
The absurd outrage — over the fact banks aren’t moving lockstep with the RBA — ignores the fact that there is more to bank assets than massive home loans.
Some people like to keep their money in the bank.
And many of those people who like to keep money in the bank rely on the interest to fund their retirement.
Arguably, by not passing on the full rate cut, I’d like to think that banks could use that to offer a slighter higher rate to savers.
This is especially important.
Because the RBA lowering the cash rate screws savers.
Savers have been losing for years
Most financial commentary revolves around Australia’s $2.5 trillion in personal household debt.
Which is why, when a bank doesn’t pass on a rate cut, there is this ridiculous anger. Lowering interest rates make those trillions of dollars of debt easier to repay.
This enormous amount of personal debt hogs the headlines.
Yet, savers have been getting screwed for a few years now.
Not that you hear much about that.
Nobody likes to talk about people with money in the bank. Pfft. Silly savers putting money in the bank.
You see, since 2016, bank deposit rates have hovered a basis point or so either side of the official inflation figure. As of today, that sits around 1.7%.
When the cash rate was at 0.75%, cash at the bank generally kept up with inflation. In other words, you weren’t losing money.
Of course, that’s if you trust the official inflation statistics. I don’t.
Roy Morgan — the antidote to ‘official’ government statistics — reckons inflation was around 3.8% in June this year.
Unsurprisingly, Roy Morgan data is almost double the Australian Bureau of Statistics’ 1.7% inflation figure.
In saying that, since 2016, Roy Morgan has consistently recorded inflation figures above 4%.
That’s in contrast to the ABS, which reckons inflation figures were around 2% during that time.
When you rely on your savings to fund your lifestyle, 2% is a huge difference.
The alarming variance between the two data sources tells us any cash parked at the bank has actually been losing value over the last three years.
If we assume the Roy Morgan inflation figure is the more accurate of the two, any cash in the bank earning interest has been falling behind the rate of inflation.
In other words, your purchasing power is declining. Even though savers are earning interest, it isn’t keeping up with the increasing cost of goods.
Here’s the thing, though.
It isn’t about to get any better.
Not only is the RBA on a mission to destroy the value of money in Australia, but savers are going to be the sacrificial lambs.
The first sacrifice: your money
For too long, the mainstream have ignored the impact on savers when the RBA lowers rates.
This week, there was a slight change in tune.
ABC News noted in May that savers were losing $1.3 billion in interest with the new, lower cash rate.
Oddly, though, the Australian Financial Review joined the pity party for savers. At the same time, an AFR article explained how the lower deposits offered by banks will earn less interest with the lower rate.
What caught my eye, however, was that the AFR implied our central bank has thrown savers under the bus, suggesting savers must be sacrificed for the ‘greater good’ to stimulate the economy:
‘The Reserve Bank is not unsympathetic to the plight of savers, but its line is that a dollar of lost interest income from a cash rate cut is equal to two dollars of interest expenses saved for borrowers.
‘Low interest rates, they may argue, have also boosted the values of other assets such as shares and property that savers may own.
‘Their pain is for the greater good, so that the economy is stimulated, and more jobs are created. And those rates could once again spark a borrowing splurge that depositors will have to fund.’
Just like that, the central bank has picked its first sacrifice to prop up a flagging economy.
Right now, lower rates are going to hurt savers.
Our central bank seems determined that this is your cross to bear for being frugal and taking care of yourself.
Of course, it won’t stop there.
But savers are the first ones to take the fall as the RBA scrambles to stave off an economic slowdown.
Until next time,