Savings account interest rates rise after rate hikes, but are they fast enough and by how much?

Rising Reserve Bank cash rates may spell disaster for mortgage borrowers, but Inge Meldgaard hopes higher rates will boost income from her savings.

“I was extremely happy,” the 69-year-old retiree told ABC News.

When it comes to passing on higher rates to savers, most banks have so far been slow to do so.

But for low-income people like Ms Meldgaard, their lives depend on it.

“When people are on such a low income as I am, even a few thousand dollars a year makes a difference,” Ms Meldgaard said.

The interest Ms Meldgaard earns on her savings from the bank has been a crucial part of her income since she retired in early 2006 due to ill health.

She said that at the time she was earning up to 10% on her savings, meaning she could support herself without a job or a pension.

Savers have suffered from years of low interest rates

Over the past few years, with historically low interest rates, there has been a steady erosion of savings rates across all banks.

This has dealt a severe blow to the safety net of many retirees and self-funded retirees.

Ms Meldgaard, who lives alone in Belgrave Heights in south-east Melbourne, said even with the old-age pension it would not be enough to cover most of her basic expenses, while she has been “very frugal and kept its spending “down to the bare minimum”.

Last week, the RBA raised interest rates for the second time in two months, taking the spot rate from 0.35% to 0.85%.

In May, the central bank raised official interest rates by a quarter of a percentage point for the first time in more than a decade to curb soaring inflation, as the cost of living rose by 5 .1% over the past year.

Most lenders transferred the full value of May’s rate hike to variable mortgage rates, while about two dozen banks are passing on the June hike in full.

It’s a different story for savings rates.

When will the banks pass on the increase to savings accounts?

RateCity analysis shows that since the rate hike this month, only about 10 banks have announced savings account hikes.

In response to last month’s rate hike, only 66% of lenders raised savings account rates in line with the 25 basis point cash rate move in May, according to Canstar.

So far, only one of the big four banks has announced that it will pass on the full value of the June rate hike to certain deposit accounts.

Commonwealth Bank said it would raise the bonus interest rate for GoalSaver and YouthSaver accounts by half a percentage point from June 17, while Westpac, NAB and ANZ have yet to announce a hike in interest. savings accounts.

Meanwhile, competition in the savings industry began to heat up, with Macquarie and ING aiming to lure savers with higher interest rates.

Macquarie Bank said it would raise the interest rate on its transaction account from 0.20% to 1.50% on balances up to $250,000 from June 17, while ING raised the interest rate on its Savings Maximiser account from 0.75 percentage points to 2.10% on balances up to $100,000 starting June 15.

Sally Tindall says consumers would do well to shop now.(ABC News: Daniel Irvine)

According to the latest figures from banking watchdog the Australian Prudential Regulation Authority (APRA), Australians are sitting on $1.27 trillion in savings, an increase of $281 billion since the pandemic.

“[Banks] aren’t under as much pressure and they’re not really draining or leaking deposit funds at the moment,” Canstar’s Steve Mickenbecker told ABC News.

A man in a suit looks at a computer screen.
Canstar’s Steve Mickenbecker expects more banks to announce their savings account prices in the coming weeks.(ABC News: John Gunn)

He added that consumers should shop around now to find the best fares as they could be paying “two or three times the average fares”.

First-time home buyers reeling from higher rates

The rate hike was a bitter pill to swallow for aspiring Perth landlord Ben Horn despite the prospect he could earn more from his savings.

a man in a brown jacket is sitting at home.
Ben Horn says a decent interest rate on savings is important for first-time home buyers.(ABC News: Jon Kerr)

“It was mostly bad news because we’re about to seek funding through a broker,” the 30-year-old accountant told ABC News.

“Knowing that rates were about to increase, knowing what that would do to our potential service capacity, that causes a lot of anxiety.”

Mr Horn said it was “unfair” that banks were quick to pass the entire rate hike on to borrowers but not savers.

Ben Horn discusses his financial situation with his stepfather on a table.
Ben Horn discusses his financial situation with his stepfather.(ABC News: Jon Kerr)

Mr Horn and his wife have been living with their parents for nine months, after their rental property was sold, but have been unable to find suitable new accommodation.

Mr. Horn has enjoyed living with his family.

He invested half of his salary in his savings for the first security deposit.

But the interest rate on his savings account was so low that he had to ask his in-laws for help.

“We would at least build up a buffer…even if it’s $50 over a year, it’s still a little extra money that can be useful in the long run.”

“The recession is likely to increase dramatically”

In general, when interest rates rise, banks make more profits, but there are other factors besides higher variable mortgage rates.

It is not easy for banking analysts to agree on how much banks will gain from higher rates.

Jefferies senior banking analyst Brian Johnson said banks’ profit margins were already under pressure for a variety of reasons.

A man is standing in an office.
Brian Johnson is a banking analyst.(ABC News: Dan Irvine)

“We can see that banks now seem to be scrambling to fundamentally raise term deposit rates. This is creating a degree of complexity on the margin that was not intended.

“On top of that we can see, for example, that the finance sector union will probably try to get 6% wage increases, you have the risk that some banks will even be forced to make up their loan losses provisions and maybe capital positions are not as strong as we thought.”

So far, the big four banks have committed a term deposit of 2.25% for a period of 11 months to 18 months.

There are even higher offers for term deposit rates in the market, up to 4.15% for five years from AMP Bank.

Mr Johnson said if customers started withdrawing their money from their transaction accounts into term deposits, it could be bad for bank revenues.

Last week, tens of billions of the market value of the big four banks were wiped out as investors worried that rising cash rates could end the robust growth in their mortgage portfolios.

“When you look at the whole market, it looks remarkably like the 1970s, that is, inflation comes in, employers pass it on through high prices, which means wage rates are increasing, so we seem to be in kind of [a] deadly wage-price spiral, [or at] the beginning,” Johnson warned.

“I think the risks of recession in Australia are actually increasing quite dramatically.”

Watch the story on The Business tonight at 8:45 p.m. AEST on ABC News Channel, or stream on ABC view.

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