When it comes to interest rates on savings accounts and term deposits, there's not much to be happy about. The Reserve Bank of Australia (RBA) cash rate target is the country's most important base interest rate and largely determines the interest rate for products such as mortgage loans, savings accounts, term deposits, and more. Recently, a sharp decline in both savings accounts and term deposits can be seen in Australia after the Global Financial Crisis (GFC). Inflation is a major issue for users of savings accounts and fixed-term deposits right now, as it has the potential to completely cancel out their earnings.
On the other hand, a higher cash rate also tends to increase the interest rate on savings accounts and new term deposits. With an inflation rate of 1.1%, you wouldn't actually earn any interest in your savings account; in fact, you've lost money compared to what the Australian dollar is now worth. Because the target cash rate is a base interest rate, this determines the interest rate that applies to financial products, such as mortgage loans, auto loans, savings accounts, term deposits, and more. Interest rates on term deposits offer a little more variety than savings accounts: you can see your average interest rate increase over a longer term, while you can earn a little more in interest depending on how often interest is paid.
Take a look at the infographic below to see how the average interest rates on bond savings accounts and term deposits in the five largest banks have changed since 2002, dating back to when the RBA started collecting data for both.The cash rate is the basic interest rate that banks charge each other on loans to manage their daily cash needs; a low cash rate means that it is cheaper for banks to borrow from each other and from the RBA, which translates into lower interest rates overall. Remember that you can't add money to a term deposit like you do with your savings account, so the interest you'll earn is much easier.Generally speaking, when providers can lower interest rates on savings accounts at will or offer a higher rate for a limited period of time, term deposit rates remain fixed throughout the term. This is usually a reflection of the objective of the cash rate, or of the overnight rate if quantitative easing is taken into account (we'll talk about this later).In conclusion, key information on Australia's short-term interest rate can be found by looking at historical data on term deposit rates. Because of their relative security (and other external factors), savings accounts and term deposits don't offer as fruitful returns as before.
However, understanding how these rates are determined can help you make better decisions when it comes to your finances.