Preparing for another savings pinch

The bad news for savers relying on income returns is set to continue

Australia’s underlying level of inflation is continuing to fall, and which paved the way for another official interest rate cut when the Reserve Bank of Australia (RBA) board met earlier in the month.

It was welcome news for borrowers, but not for most savers – especially the millions of Australians with money tied up in savings accounts who are heavily dependent on regular account interest payments.

When borrowing interest rates are reduced, account savings interest rates typically fall in tandem.

In fact, many financial institutions who had been pre-empting another rate cut and had already quietly started to reduce their account savings rates.

According to rates comparison website Canstar, only a handful of banks are now offering savings rates above 5%. And, in the majority of cases, receiving those rates are conditional on meeting minimum monthly deposit amounts or transaction numbers.

Just like the rates on savings accounts, term deposit rates have also been declining steadily over time, since well before the RBA lowered its official interest rate by 0.25% to 4.10% in February this year – its first rate cut since November 2020.

In fact, RBA retail deposits and investment rates data shows term deposit rates across a range of durations have been steadily declining since July 2024.

For example, the average 12-month term deposit rate for a $10,000 amount has been progressively reduced nine times since July 2024, from a peak of 4.50% to an average rate of 3.70% at June 30, 2025.

The average three-year term deposit rate for a $10,000 amount has been progressively reduced six times over the same period, from a peak of 3.95% in July 2024 to 3.05% at June 30, 2025.

The chart below tracks the average 12-month term deposit rate for $10,000 amounts between January 1995 and July 2025, highlighting the rise in account interest rates from their historical low point in early 2022 to their peak, and then their gradual decline since the middle of 2024.

Implications for savers and retirees

Many Australians, especially retirees, rely on the interest earned on their savings to cover their living expenses, and any reduction in interest rates can mean a substantial decrease in their income.

This has been the reality for many people over the course of the last year, and further cuts are on the near-term horizon.

The decline in savings rates also has broader implications for the economy.

When savers earn less interest on their deposits, they have less money to spend, which can lead to a decrease in consumer spending. This, in turn, can slow economic growth, as consumer spending is a key driver of economic activity. 

Additionally, lower savings rates can discourage people from saving, which can have long-term implications for financial stability.

Turning savers into investors

New research released has estimated that the implementation of certain retail investment reforms in Australia could potentially unlock at least $185 billion in excess cash savings and help more Australians achieve greater financial security.

These reforms include facilitating access to affordable financial advice, introducing tax incentives to boost investment outside of superannuation, improving financial literacy levels, and increasing fee transparency and competition.

For retail investors, the decline in term deposit rates and savings rates presents a challenge. With returns on traditional savings accounts and term deposits declining, some investors may need to look for alternative investment options to generate income.

While there are other income-generating options available, such as dividend-paying stocks and bonds that typically offer higher interest rates than savings accounts and term deposits, it is important for investors to carefully consider the risks and rewards of these investments before making any decisions.

In the meantime, the income road ahead for many people needing to generate income from their savings may become increasingly challenging as interest rates continue to fall.

Source: href="https://www.vanguard.com.au/personal/learn/smart-investing/investing-strategy/preparing-for-another-savings-pinch">Vanguard August 2025This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™

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