With the European crisis impacting various geographic markets across the world, commodity price sensitive countries such as Australia are beginning to feel the impact. It has been resilient compared to other OECD countries since the 2008 financial crisis but its Reserve Bank of Australia has lately been forced to lower its cash rate. This however is significantly higher still compared to other major economies : Federal Reserve (0.25%), Bank of Canada (1%), Bank of England(0.5%) , Bank of Japan (0.1%), European Central Bank (1%), Swiss National Bank (0%) , Japan (0.1%) and Reserve Bank of Australia (RBA) (3.5%)
While major economies in Europe, United States and Japan have low yields on their bonds and deposits, Australia has been one of the economies with a yield that has been attractive to many foreign investors which has subsequently pushed up the value of the Australian dollar. This significant increase in the exchange rate has had a corresponding negative impact across tourism, manufacturing and export sectors and has recently has been one of the reasons the RBA had to lower its cash rate. However retirees in Australia who have shifted funds out of the shares due to wild fluctuations in the markets who had put some of their cash and savings into term deposit interest accounts have been impacted.
While they may have minimized some losses compared to shares, recently cuts by the RBA and subsequent cuts by banks have seen deposit rates fall from about 6% a few months ago to about 4.75% now. Within Australia, banks who provide term deposits to retail consumers are called 'Authorized Deposit-taking Institution' with funds of up to $250,000 guaranteed by the Federal Government (a per person basis).
This however is in contrast to many US savers who realize rates of return for certificates of deposit (similar to Australian term Deposits) yield only 1% and even lower yields in Japan. So while lower rates may mean insecurity for retiring Australians, relative to the world they are offered a relative high yield for a lower risk investment.(excluding inflation risk).
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com