Savers to benefit with OCR rise

Photo / APN

Flow-on of expected interest rate hike will boost income for those with money in bank.

Savers should expect to feel some relief from next week with economists predicting short-term deposit rates to head up in line with a predicted increase in the official cash rate.

Savers have faced years of low interest rates for stashing their cash in the bank after the Reserve Bank sliced the OCR from a high of 8.25 per cent in July 2007 to just 2.5 per cent in April 2009 to support the economy through the global financial crisis.

But next Thursday the bank is widely expected to lift the rate by at least 0.25 per cent to 2.75 per cent.

BNZ chief economist Tony Alexander said it was reasonable to expect short-term interest savings rates to rise with the cash rate but when banks would move was unknown.

"It depends when banks hold their pricing meetings and whether they want to lead the pack or follow it."

On-call savings accounts currently pay up to 4 per cent depending on how much a person has in the bank and the type of account. Some banks have already moved their longer-term deposit rates.

Last week, ANZ lifted its nine-month, one-year and 18-month rates. That followed on from a range of term rate increases by Westpac of between 10 basis points and 35 basis points on February 20.

Alexander said savers should expect a 2 to 3 per cent increase in deposit rates over the next two to three years. The cash rate increase was designed to discourage borrowing and encourage saving but he doubted it would see a rush to save more. "I don't think the change in interest rates will be big enough to change savings behaviour."

Alexander predicted it could see some switch from alternative investments to savings accounts and term deposits. "But the changes will be very small."

Cameron Bagrie, ANZ chief economist, said it was ironic that the global economy got into a pickle because people weren't saving enough but that the solution was a drop in central bank rates penalising savers.

"There was no other choice."

Despite the low interest rates, savings in the bank hit record levels in December as people have fled to safe haven investments.

According to the Reserve Bank, total household deposits were down slightly at $125.2 billion in January, nearly double the $67.3 billion in January 2007 before the global financial crisis hit home.

Bagrie said now central banks were looking to normalise interest rates they wouldn't stay at record lows. That would bring pain for mortgage borrowers but leave savers salivating.

He doubted the rate increase would encourage saving. "The reason interest rates are moving up is because the economy is improving." That was typically a sign for people to take their money out of the bank and invest it. "That's a good thing."