For a few heady months at the beginning of 2010, as Europe seemed to teeter on the edge of full-blown economic crisis, cash was king to Australian banks. Two years later, and even though European uncertainty continues, the demand for cash seems to have slowed. Does this mean cash has lost its shine?
Recently the financial products ratings agency, Canstar, noted the margin between the official Reserve Bank of Australia (RBA) cash rate and a one-year term deposit had shrunk to one per cent – a significant difference from the 2.35 per cent rate of two years ago. Yet despite this lower rate of return, many consumers – and businesses – still feel more comfortable keeping their spare cash in the bank rather than investing it in equities or even property.
“We know the markets are still volatile and there’s still a lot of uncertainty out there,” says Investec Savings and Deposits Specialist Cindy Arthur.
“Cash remains a critical component of most portfolios, and until the situation in Europe settles, cash is still a safe haven. Cash can offer a respite from the roller-coaster ride of other investments like equities”.
Cash remains a critical component of most portfolios, and until the situation in Europe settles
Things have changed since the savings boom of 2010, and according to Ms. Arthur, the main reason is the end of that cycle where banks were chasing cashed-up customers. “When the Global Financial Crisis started, banks were under serious pressure to build liquidity and as a result interest rates for savings were very competitive,” she said.
“But that has slowed down now. The rates are still competitive, but they’re certainly not as aggressive as they were. Over the last year and since the RBA started decreasing interest rates, the banks have slowly cut interest rates on deposits.”
Ms. Arthur said this is not to say banks have lost interest in cash. “With a considerable amount of their funding coming from the wholesale market, there will always be competitive offers out there. However, as interest rates on savings accounts change regularly, it is important for people to ensure they are receiving a fair and competitive rate.”
Alternative Cash Solutions: what are the options?
A lot of people like the flexibility of a call account because it gives them instant access to their money but call accounts generally pay a very low rate of interest and some pay no interest at all,” she said.
“The contrast to a call account is a fixed term deposit where you’re locked in for a specified period but you earn a competitive interest rate.”
She said Investec has gone some way to overcoming this problem with the introduction of its 32 Day Notice Account.
“The difference between the 32 Day Notice Account and a term deposit is that with the 32 Day Notice Account you can give 32 days’ notice at any time before withdrawing funds. With a term deposit, if you select a fixed term, for example, for 90 days, your money is not available to you again until the end of the period, although some banks will allow you to break the term with a penalty fee.”
She said Investec’s 32 Day Notice Account, which is a hybrid of a fixed term and call account, offers a competitive monthly interest rate, (currently 5.15 per cent, variable). The company is currently offering new clients in the healthcare sector an extra one per cent on top of that for the first 90 days.
“We believe the 32 Day Notice Account gives the client more options, combining the appeal of a higher interest rate than is generally offered for call accounts with increased flexibility around accessing the funds,” said Ms. Arthur. “It also makes saving appealing.”
Disclaimer
The information contained in this article (“Information”) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions. The opinions expressed in this publication are those of the respective authors and do not necessarily reflect the opinions of Investec Bank (Australia) Limited.
