Why a cash rate hike means good news for your savings

The Reserve Bank of Australia has hiked the cash rate yet again to 0.85% in today’s board meeting. But while the news focuses on the downsides for homeowners, it’s important to remember higher rates mean good news for your savings account and term deposit.

Not everyone has a home loan in Australia. In fact, data from the Australian Institute of Health and Welfare shows around a third of residents (32%) were renters, meaning there are 2.6 million households where a cash rate hike may be something to celebrate.

Why a cash rate hike can be good for savers

Now that interest rates are on the rise again, savings account and term deposit providers should begin hiking rates, allowing savers to finally earn a return on their nest eggs again.

The cash rate is a benchmark rate that lenders and financial providers across Australia look to, to help influence their decision around how low or high interest rates should be. The lender may still have some discretion around how it sets its interest rates, but the theory is that when the cash rate moves, interest rates on financial products follow.

Put simply, when the cash rate increases, so should interest rates on products like your savings account and term deposit. This means you should gain a higher return on your nest egg.

When will you see an interest rate hike?

A term deposit interest rate is fixed, meaning that while you have locked in your deposit for the fixed term, your interest rate will not change. Lenders will still move interest rates with the cash rate, so when your term deposit period ends you may have the opportunity to lock in a higher interest rate for a new term.

This means you may not see an interest rate hike’s impact on your term deposit balance until you rollover to a new term or switch to a new deposit account.

RateCity’s database shows that on 1 April 2022, the average 12-month term deposit rate on a $10,000 deposit was just 0.58%. Following the first cash rate hike in a decade in May 2022, this average term deposit rate is now 1.11%. If your term deposit is coming to maturity and you’re considering rolling over to a new term, you may find that your return on your deposit is greater.

A savings account interest rate is variable and subject to market fluctuation. When the cash rate moves, providers are encouraged to move savings rates similarly. If your savings account provider passes on your rate hike, you should see it impact your savings after the commencement date stated by the provider – typically in the same month as a rate hike.

With the cash rate having sunk to a record-low of 0.10% by 2022, savings account providers reduced interest rates to nearly zero across all products. RateCity’s database shows that on 1 April 2022, prior to the first cash rate hike in a decade, the average savings account rate was 0.28%.

After one hike in May, the average savings account rate on 1 June 2022 was 0.33%, indicating the recent cash rate hike has barely helped push up rates across our database. This is because some providers have not passed on the cash rate hike to all their savings accounts, if any.

When your bank doesn’t pass on a rate hike to your savings account

Not every lender has agreed to pass on hikes to savings accounts. Australia’s biggest bank, CommBank, initially stated it would only be offering a new, competitive term deposit rate, instead of hiking savings accounts. Over a week later, it announced it would be increasing savings rates but only for its NetBank Saver account, not its GoalSaver.

Many savings account providers have not passed on the first rate hike in May to savings accounts customers. As the latest APRA statistics for March show that Australian households have $1.26 trillion in the bank, providers are overflowing with cash.

Paying interest on accounts that have increased by $272.4 billion since the pandemic began would be a costly exercise. This means that a cash rate hike does not guarantee your provider will pass the increase on to your interest rate.

How high will savings and term deposit rates go?

Many savings account and term deposit providers have passed on the full cash rate hike to their customers. And with the big banks predicting that we’re in for two years of cash rate hikes, you may be curious how high rates could climb on your savings account and/or term deposit.

RateCity has crunched the numbers following today’s cash rate hike. Assuming that NAB’s forecast of a 2.60% cash rate by 2024 comes true, we may see the average savings rate increase to 2.58%, and the average 12-month term deposit rate for $10,000 balances increase to 3.36%.

How high savings and term deposit rates may climb

Source: RateCity.com.au. Note: Figures based on NAB’s forecast of a 2.60% cash rate in 2024. Based on average ongoing savings rate, excluding kids accounts and pensioners, and average 1-year term deposit rate on a $10k deposit.

What are the highest rate savings accounts and term deposits?

If your current savings account provider has not announced it will be increasing your savings rate, or if your term deposit is coming to maturity and you’re not confident it will rollover to a competitive rate, it may be worth comparing your options.

There are several savings account and term deposit providers offering competitive interest rates that may help you earn a greater return on your nest egg. Keep in mind that for some savings accounts there may be conditions you need to meet to earn the highest rate, such as making minimum deposits or not making withdrawals.

Be sure to read the terms and conditions, as well as compare any fees involved, before you make the switch.

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