Cash is trash
More punishment for savers while borrowers celebrate – interest rates fall again
In early August, the Reserve Bank of New Zealand (RBNZ) lowered the official cash rate to a record low of 1.0%, and indicated it could go lower. Along with some of the other possibilities described below, this has revitalised the old saying that “cash is trash” – or in other words, cash left for the long term in bank accounts is rubbish compared with what can be achieved by properly investing elsewhere.
While it may seem unimaginable to some Kiwis, the RBNZ Governor hasn’t ruled out steps including negative interest rates and even taxing savings. In fact, the RBNZ Governor is openly talking about the possibility of such steps.
Why would the RBNZ do this?
It’s hoped that lower interest rates will stimulate the NZ economy, which has been lagging in recent times, and has been propped up with immigration, high export levels and low unemployment.
However, the recent move by the RBNZ confirms it is concerned with the impact on the New Zealand economy of falling business confidence, flatlining measures of productivity, and slowing economic activity in many of the countries where we export our products.
What else could they do?
Now that interest rates are nearing zero percent, there are a few other drastic and unconventional options which the RBNZ may use, including:
- Moving to negative interest rates: The RBNZ Governor, Adrian Orr, recently said "It is in the realm of possibility that [New Zealand] could use negative interest rates." Practically, that means negative interest on your savings in the bank, which means you would pay the bank to store your money.
- Printing money on a large scale by buying assets, in a process called ‘quantitative easing’.
- Adrian Orr has even mentioned one of the simplest options available: a cash tax. This would punish people who save by taxing any cash they put in the bank.
Clearly, any measures such as negative interest rates or cash tax will be a double-whammy for anyone putting money in the bank. The other ‘whammy’ is inflation, which already eats your savings.
Has this happened before?
For NZ, this is uncharted territory, even though many financial commentators have seen such changes coming for some time.
For example, negative interest rates are now reasonably commonplace in developed economies, and countries such as Sweden, Japan, Switzerland, and Denmark all currently have negative rates. Even the whole Eurozone (which includes significant economies such as Germany and France) is currently at zero percent. In fact, in 2016 it was reported that Swiss savers started to turn away from bank accounts and instead store wads of cash in boxes.
How will lower interest rates impact you?
The two most obvious ways are lower mortgage rates for borrowers, and lower interest rates for those who are saving money in the bank. (We’re already seeing increased numbers of people get in touch to see if we can find them a better mortgage rates, or if we can help them get a better return on investment than what the bank offers). Aside from that, when rates last dropped in May of this year, we outlined a couple of other ways in which falling interest rates may impact on regular Kiwis.
Cash is trash - can you do better than the bank interest rate?
If you’d like to talk with a trained professional about whether holding cash in the bank is a suitable investment choice for you, please reach out to us – it’d be our pleasure to have a no-obligation initial chat.
Make your mortgage work for you:
Or, to ensure you’re making the most of recent changes in interest rates, our mortgage lending team also assist with a no-obligation and complementary review of your existing mortgage, help first home buyers with the overall process, and assist with property investment loans.