Rising inflation set to deliver negative returns on cash savings

Money in the bank has historically been a safe investment, with interest on your cash usually a great way to grow your savings.

This could be set to change, with the annual inflation rate and bank interest rates coming close to achieving parity.

Reserve Bank of Australia (RBA) data shows that the inflation rate in March 2019 was 1.3 per cent while the bank term deposit average interest was 2.15 per cent.

That is a far cry from the average interest rate of eight per cent achieved in 2008, a figure which has gradually fallen since it sat at 6.15 per cent in December 2009.

So, is cash in the bank still a stable investment? Or will putting your money in the bank eventually deliver negative returns?

The future of inflation in Australia

While the inflation rate is close to the bank’s interest rates, it is not actually rising.

In fact, the inflation rate has dropped considerably since it reached a peak of 4.6 per cent in September 2008 at the height of the Global Financial Crisis.

As global markets stabilised, the inflation rate has gradually dipped to the current rate of 1.3 per cent.

It is predicted that these inflation rates will begin to rise again, with Statista tipping it to reach 2.52 per cent by 2021.

That would mean it could overtake current interest rates at most banks and cash savings may deliver negative returns.

Will the banks raise their interest rates?

In the short term, the answer is most likely no.

The RBA delivered a cut to the interest rate in June and again in July, reducing it to a record low of 1 per cent.

Marcel Theliant from Capital Economics said he anticipates another rate cut in November.

“We reiterate our forecast that the RBA will eventually slash interest rates to 0.5 per cent,” he affirmed.

That suggests cash returns on your savings are not expected to improve in the short term and the prospect of negative returns could become a reality.

As with all market fluctuations, this could change in the future.

Other ways to invest your money

It is not all doom and gloom for investors, it just means that different strategies might be required to get your savings working harder.

Your savings could be invested in other ventures that, while having a higher return that will eclipse the current inflation rate, come with a higher level of risk involved.

Tristan Harrison has an advanced diploma from the Association of Accounting Technicians (UK) and has been contributing to Yahoo’s The Motley Fool investment column since 2016.

He said that sticking to cash in the bank as a long-term option could be risky and pointed to Japan’s enduring low interest rates as proof that the current situation could remain in place for some time.

Learn more about the value of a diversified investment portfolio and how a split tactics strategy could help you get your savings working harder.

The information on this website contains general information and does not take into account your personal objectives, financial situation or needs. We recommend you consult a licensed financial adviser. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice.

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