Interest on savings in the bank is likely to fall further. Photo / Getty
Interest on savings in the bank is likely to fall further. Photo / Getty
Financial experts are predicting deposit rates to fall further in the wake of the official cash rate cut and say retirees shouldn't expect to live off the interest on their savings for the foreseeable future.
The Reserve Bank cut the OCR to a record low 0.25 per cent this morningamid concerns about the spread of the coronavirus and its impact on the economy.
Banks have so far cut floating home loan interest rates and one, Westpac, has cut on-call deposit rates but fixed home loan and term deposit rates remain unchanged.
And he urged those with money waiting to invest to wait on the sidelines for now and leave the money in the bank.
Hawes said he was not worried about the banks at the moment although the banks could come under pressure in the future from corporates that default on their loans.
"If some corporates started to default that could have wider ramifications, but we don't have that at the moment."
Retirees living off interest from term deposits would either have to eat into their capital or cut back on costs, he said.
"It won't be easy for some people." But he said at least retirees had New Zealand Superannuation to fall back on.
Liz Koh, principal of financial advice firm Money Max, said the official cash rate was only one factor in setting term deposit interest rates, it was also linked to the cost of borrowing.
"But given globally interest rates are coming down I think it is likely we will see that."
Koh said now was the time to have plenty of cash on hand.
"Whatever your spending needs are for the next five years try and have that in the bank."
Koh said the bank was not the place to invest but to keep money until you needed to spend it.
She said it didn't matter what interest rates people were being paid and those who were retired needed to realise they could not live off bank interest.
"If you need income you should use your capital to provide cashflow. When in retirement you need to drop the distinction between income and capital. You have got to use the money some time. Put it in the bank and use it up," she said.
She said people had to get used to the idea that bank interest was not a way of providing an income in retirement. "That message needs to be loud and clear."
For those who had other funds above the cash in the bank they needed to take a long term view, Koh said.
They could either take a wait and see approach or drip feed it into the market to take advantage of dollar cost averaging.
"While it's nice to think you might get a bargain you never know if it is the bottom of the market until it has been.
"It can suddenly tick up and you have missed it."
Those who were uncertain were best to take a wait and see approach, Koh said.
Hawes said people in KiwiSaver should stay put unless they needed their money out soon.
"Anybody who needs their money this year should be moving it into a conservative fund or a cash fund."
He said everyone else should stay put and check their KiwiSaver provider was holding cash in readiness to take advantage of buying opportunities.
"There will be an uptick. I think investors as opposed to people with bank deposits, need to see this as an opportunity."
Hawes said it maybe months or years before the market bounced back but it would bounce back, although it was impossible to predict when that would be.
"Nobody rings the bell at the bottom of the market."
Koh said those who were concerned about their investments should re-visit their asset allocation to make sure you were comfortable with it.
She said people should make sure their investments were well diversified and covered all asset types as well as owning a range of investments within an asset class.
They should also check their investment against the timeframe in which they need the money. Investments in a growth fund should be for 10 years plus while a balanced fund should be five years plus, she said.
And thirdly she said investors should rebalance their portfolios by buying low and selling high where possible.
Koh urged anybody looking to borrow to buy a house to hit the pause button and take a wait and see approach.
"We are in unknown territory at the moment."
"Don't do anything drastic." And those worried should seek financial advice.
