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Posted July 30, 2018 by MoneyLink

When Will Bank Depositors Get a Pay Rise?

Interest rates are starting to rise around the world so retirees with money in the bank will be wondering when they can expect a rate rise on their savings accounts and term deposits to give them more income to live on.

Short term interest rates are set by central banks. During this long recovery from the 2008-09 financial crisis only the US Federal Reserve has raised official rates so far. The European Central Bank is reducing its stimulus measures but hasn’t lifted rates yet.

Official rate rises still appear to be some way off

Official rate rises by Australia’s Reserve Bank were expected this year (including by me) but they now appear further off again, unlikely before next year.

Long term interest rates are not set by central banks but by financial markets. They have been edging upwards for more than a year. The negative interest rates that existed a couple of years ago in many countries are now gone.

Will these rate rises flow through to bank depositors here? Our banks borrow around one third of the money they lend in Australia from overseas. The rising longer-term rates overseas mean this finance is now costing them more. Their margins are being squeezed.

It is very likely that banks will raise rates on home and business loans in response irrespective of the RBA. Bank depositors will also be dismayed to find banks may cut rates on deposits to help relieve the pressure on margins.

People relying on bank interest for income to live on may have to wait quite a while yet for a pay rise. They should look for other options to generate income, such as allocated pensions and managed funds.

Diversified funds can pay a better return

Diversified funds have had another good year. Average returns for growth funds have been about ten per cent. Can such returns continue? The share market hit a new post-2009 high last Friday. Some people suggest this means we are due for a correction or slump.

The recovery from the global financial crisis has been running a long time. However, we still have very low borrowing costs, low inflation, and higher unemployment meaning wages won’t rise rapidly. Company borrowings are low and profits are increasing.

Loan arrears are low and banks are toughening their lending criteria. All these indicators suggest the economic growth cycle has a while to go yet. Eventually interest rates will rise, unemployment will fall, inflation will increase and the economy will slow, but not for some time yet.

Get financial advice about your options

Retirees should get financial advice about options other than bank deposits to generate income. Other investments aren’t as stable but many that provide much higher income are very safe, even if they fluctuate a little.

This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.

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