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Here’s why your bank account doesn’t pay real interest anymore

Sebastian Bowen
Cut interest rates

You don’t have to be an investor in ASX shares to notice that bank accounts don’t seem to pay decent interest rates these days. I’m sure that every person with a bank account (so pretty much everyone) would have noticed this trend over the past few years.

It’s certainly a strange phenomenon. This writer can remember a time not too long ago when a savings account would get you a 6% interest rate without too much effort. Today, you’d be lucky to get 2%.

Just check out the current term deposit offerings from Commonwealth Bank of Australia (ASX: CBA) below:

Source: commbank.com.au

This has understandably created a lot of stress within the community – especially amongst those who rely on interest income to fund their lifestyle or retirement. Savings stored in a bank are one of the safest ‘investments’ out there. But diminishing returns from these bank accounts are forcing conservative investors into more risky investments like ASX shares.

Even people who are trying to save up some cash for a first home or simply a holiday are being disadvantaged by this new paradigm.

Why are bank accounts yielding next to nothing?

Well, it’s all to do with interest rates. You may have heard talk of interest rates in conjunction with home loans and mortgages, but rates are a sword that cuts both ways.

Basically, the official interest rate (also called the cash rate) is set by the Reserve Bank of Australia (RBA), which is an arm of the Federal Government. The RBA uses this rate to grow or shrink the economy up or down depending on what’s needed at the current time. Cheaper money (through lower interest rates) usually means more growth and vice versa.

In simple terms, the cash rate is the rate that all other banks are forced to lend to each other at – and thus, forms the floor of the rates they can charge (and pay) us as customers.

A lower cash rate means lower mortgage interest rates but also lower savings payments. Right now, interest rates are at their lowest levels in history at 0.75%, which explains why your bank account isn’t paying you anything in real terms.

When will this change?

It’s hard to say. The RBA is keeping interest rates low to try and stimulate the economy and increase inflation to a healthy level. I personally can’t see our record low rates going up until there is an uptick in inflation. The RBA aims to achieve inflation between 2–3% but in the last quarter of 2019, we booked inflation of just 1.9%.

So it looks as though low interest rates will be here for while!

The post Here’s why your bank account doesn’t pay real interest anymore appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020