Negative interest rates – should we care?

We’re hearing a lot about negative interest rates, with banks in Europe and Japan charging savers to hold their money.

Australia is affected by the economic outlook and money markets globally but fortunately the outlook for rates is brighter here.

Our interest rates are low, but not approaching zero, even after the Reserve Bank’s (RBA) decision this week to cut its benchmark cash rate by 25 basis points to a record low of 1.75%, setting the direction for interest rates charged – and paid – by the banks.

Only a month earlier, the RBA board had decided not to cut rates, saying the country was adjusting to the end of the mining boom and there were reasonable prospects for the economy to continue to grow.

That mood changed when inflation figures were released, showing a fall in the consumer price index for the first time in seven years.

The economy is not performing as well as the RBA had anticipated and it acted to cut rates in order to stimulate business borrowing and investment.

It’s a lesson on the volatility engulfing economies globally and no comfort for savers, particularly those who need the certainty of cash and who rely on interest income for living expenses.

Savers in other countries are caught in the negative rate grip but fortunately the outlook is still more encouraging here. And for investors looking for certain returns, term deposits offer the ability to guarantee a rate for a fixed term of up to five years.

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