RBA admits it has screwed savers

RBA admits it has screwed savers

What a kerfuffle that was.

I’m talking about last week’s rate cut…

…and what one bank didn’t do.

The internet was up in arms.

How dare they!’ was the universal cry.

Greedy bank’…noted someone on Twitter.

Our own Treasurer even ‘blasted’ this particular bank, saying it was not doing the right thing by customers…1

That statement just goes to show how out of touch he is.

After all, not all bank customers are debtors…

Government bullies banks

Last week, shortly after the Reserve Bank of Australia lowered the cash rate by 0.25% to 1.25%, ANZ did the unthinkable.

It lowered its mortgage rate by only 0.18%.

ANZ didn’t pass on the ‘full cut’.

NAB passed on the full cut. So did CBA. Westpac only dropped loans by 0.20%. Although, being the last major bank to drop rates, it didn’t cop the sort of heat that ANZ did.

The problem with all this faux outrage over a lousy seven basis points is that it ignores what banks do.

More to the point, 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 that ANZ didn’t move 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, ANZ may be able to offer savers a better rate than other banks.

This is especially important. Because the RBA lowering the cash rate just screwed savers.

Savers have been losing for years

Most financial commentary revolves around Australia’s $2.5 trillion in personal household debt.2

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 1.8%.

When the cash rate was at 1.50%, 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 3.7% in May this year.3

Unsurprisingly, Roy Morgan data is almost double the Australian Bureau of Statistics’ 1.8% 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 yesterday that savers were losing $1.3 billion in interest with the new, lower cash rate.4

Oddly, though, The Australian Financial Review joined the pity party for savers. Just this morning, 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,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia