Rate cuts help economy more than they hurt savers

Adam Smith 16 September 2016

Piggybank home loan see saw balanceBorrowers react more to interest rate movements than savers, a study by the Reserve Bank has found.

While RBA rate cuts may erode savings for some Australians, the Reserve Bank has found the country as a whole sees more benefit than detriment, the Australian has reported.

A study from the RBA found lowering the required mortgage payments for borrowers by $1 resulted in an extra 20c of spending. Meanwhile, raising the interest income of savers by $1 only increases spending by 4c.

The RBA also concluded that a 1% decline in interest rates leads to an average 0.1-0.2% rise in household consumption, the Australian reported.

The RBA study also drew contrasts between the demographics of net borrowers and net savers. The average borrower is younger, better educated and earns more income than the average net saver. Borrowers are also twice as likely to be in the workforce.

The RBA put the difference down to the life stages of the two groups, the Australian said. Households with a head of household over the age of 55 hold more interest-earning assets, while younger households carry larger amounts of debt. The study found the average debt of net borrowers was $214,000, while the average interest-earning assets of net savers amounted to $64,100.

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