Savings accounts in 2016: Forecasted to pay more

Posted: 29 December 2015 4:47 pm News


Will savings account interest rates finally improve in 2016?

Savings accounts paid less in 2015. Banks have dropped rates on their term deposit and savings accounts throughout the year. If your bank deposit is paying less and you’re feeling pressure, compare savings accounts and switch in 2016 so you can earn more interest on your cash investment.

How do I earn more interest when rates are low?

  • High-interest savings accounts that offer bonus interest

While rates on high-interest savings accounts (HISA) are down in 2015, it’s still possible to find yourself a competitive rate. Bonus interest savings accounts give you more interest when you meet certain conditions, such as making a deposit over a certain amount each month and making no withdrawals. These accounts give you at-call access to your money. Unlike a term deposit, you’re not locked in for a specific period.

In 2015, we saw some major banks drop the base rate and lift the bonus rates of interest. If you’re confident you can meet the bonus interest conditions, a high-interest savings account that rewards you with bonus interest when you meet the minimum deposit and withdrawal conditions can be a good way to earn a competitive return on your cash deposit.

  • Term deposits or high-interest savings accounts?

Some term deposits offer returns a touch above the rate of inflation, which decreases the value of your money when the fixed investment matures. For shorter terms of up to two years, it can be better to invest your money in an at-call high-interest savings account. Bonus interest savings accounts reward you with greater returns when you make regular deposits and no withdrawals. Some of the top high-interest savings accounts we compare offer rates a full 1% above what you can get on a 12-month term deposit.

  • High-interest savings and term deposit accounts paid less in 2015

Banks have trimmed term deposit and high-interest savings account rates over the past couple of years. In 2015, each of the big four banks cut the returns on their flagship at-call savings products, while there’s been a trend among other major banks to replace base interest with bonus interest.

Out of the savings accounts we compared from the big four banks, the Westpac Reward Saver saw the biggest cut in rates by almost 0.70% p.a. This was followed by Commonwealth Bank with a combined reduction of 0.60% off the variable base and bonus rate of interest. ME, RaboDirect and RAMS all dropped the base variable rate of interest on their Online High Interest Savings Accounts 0.25%, 0.95% and 0.20%, respectively, while increasing the bonus interest rate by 0.60%, 0.95% and 0.30%, respectively.

Term deposit rates have also fallen across the board in 2015. Notably, ANZ wiped 0.80% off its three-year term deposit, and NAB dropped its five-year term deposit rate by 0.70%.

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What about 2016?

While there are more to savings and term deposit rates than the cash rate, a hike in the cash rate from RBA will be considered good news for savers. Currently, the cash rate sits at just 2.00%, the lowest point in a decade. The majority of economists on the RBA expert panel have anticipated a cash rate rise beyond 2016. The consensus among the nation’s top economic forecasters is that there’s little reason for the RBA to drop the cash rate any further. Strong employment data and consumer sentiment as well as a competitive Australian dollar are cited as reasons for the RBA to hold and wait. Only a handful of economists on our expert panel have predicted the RBA will lift the cash rate in 2016.

The cash rate, funding and how banks set savings account rates

We all watch the RBA’s cash rate decision on the first Tuesday of the month with a keen eye. The cash rate plays a role in how much the bank gives you on your cash deposit. But it’s not the whole story. The domestic cost of money, borrowing from overseas markets, access to Australian consumer deposits and shareholder equity influence how a bank makes money.

The start of 2015 also saw the implementation of new regulations such as the Basel III liquidity standards, which dictate how much money a bank must have on hand at any given moment. While these new regulations mean a bank needs a particular amount of liquid funds to cover obligations if things go bad, it’s only a small contributing factor as to why banks have reduced savings account rates in 2015.

Savings accounts are used to attract new customers, and deposits from Australians are a key part of a bank’s funding mix. In 2015, most banks dropped their savings account rates while the cash rate held steady. Banks are competing less for savings business.

This all plays into how a bank sets rates on high-interest savings accounts and term deposits — what they can afford to pay you for investing your cash.

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