Interest rates are breaking through a key barrier: it’s now possible to make returns that are slightly above inflation simply by putting your money in the bank.
Until recently, holding money in a “high interest” savings account would still leave you with less purchasing power over time, because rampant inflation was gobbling up any interest you earned, plus a bit more. It meant savers were getting a negative “real” or after-inflation interest rate.
It is now possible to get a return from savings that is slightly higher than inflation.Credit: Josh Robenstone
But after the rise in interest rates, most recently this week’s, there are more savings account interest rates starting with a 5, and some of the most competitive offers are a tad higher than the latest annual inflation rate of 5.4 per cent.
Is this a sign of things returning to normal in the financial world? Or is it an illustration of how moving interest rates (monetary policy) creates arbitrary winners and losers across the community? I’d say it’s both.
In one sense, the fact savers can now get 5 per cent returns by taking no risk (bank deposits are government guaranteed) shows how much things have changed since the era of ultra-cheap money.
When interest rates were near zero, it caused all sorts of weird outcomes, such as investors signing up for negative yields on bonds, or rushing like mad to invest in loss-making start-ups. Savers are also meant to get some sort of reward for putting their cash in the bank so that money can be lent out to someone else: it doesn’t make sense for savers to go backwards.
The fact savers can now get 5 per cent returns by taking no risk ... shows how much things have changed since the era of ultra-cheap money.
But in another sense, this good news for savers is another reminder of monetary policy’s ability to redistribute wealth from some groups to others. While recent home buyers with big mortgages face hefty increases in their loan repayments, those with large savings balances (who are generally older, and often retirees) are now benefiting from higher income.
The interest rates banks pay on savings accounts tend to get far less scrutiny than mortgage rates, even though there are far more savers than mortgagees in the community.
Savings accounts finally beat inflation as cheap money era ends
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11.11.2023
Interest rates are breaking through a key barrier: it’s now possible to make returns that are slightly above inflation simply by putting your money in the bank.
Until recently, holding money in a “high interest” savings account would still leave you with less purchasing power over time, because rampant inflation was gobbling up any interest you earned, plus a bit more. It meant savers were getting a negative “real” or after-inflation interest rate.
It is now possible to get a return from savings that is slightly higher than inflation.Credit: Josh........
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