How Savings Rate Cuts Affect Consumers

By Shane | News

Nov 18

What is a Savings Rate?

A Savings rate is defined as the value stated as a percentage or ratio, that an individual can deduct from his or her net income for the purpose of saving it for retirement. That particular amount of money is usually put invested in very low-risk investments such as money market funds or for a retirement account.

What Are The Factors That May Affect Savings Rate?

Savings rates tend to reduce as populations age. In this case, they chose to spend their money rather than saving them. Interest rate policies can also affect the decision of the people. Some other factors include:

  • Confidence

Consumer confidence can affect the savings rate. If the households could feel negativity towards the economic opportunities, consequently, they will prefer to save more and focus on paying off their debts.

  • Financial Status

When a credit crisis happens, credit can’t be obtained easily. Therefore, financing will decrease, and people will choose to focus on saving. On the contrary, a greater chance of credit, and an increase in work productivity can cause a lesser chance of saving.

  • Wealth  

 Another factor that can lower savings rates is the increase in wealth. People usually save to buy properties such as their own home. The housing market has a big influence on saving in Australia. Increasing house prices promotes mortgage equity withdrawal, and at the same time, an increase in spending. Conversely, a decrease in house prices has the opposite effect.

  • Net Income Growth

Savings rates can be affected by wage growth. Negative net income growth will result in a decline in the savings rate. As a result, people will spend through financing and from their savings.

  • The Effect Of Savings Rate Cuts

Economic experts believe that a higher interest rate can lead to lower overall expenditures and higher savings.  It is because the substitution effect outweighs the income effect.

Substitution Effect

Lower interest rates substitute saving for spending. It implies that a cut in the interest rate also means a drop in income as these people receive lower income payments. It will attract consumers to hold their cash rather than spending it. For instance, if a pensioner relies on interest payments from saving, he may decide to save more with the intention of maintaining his target income from his savings.

Income Effect

The amount of spending is based on income. Lower interest rates make saving less attractive. However, some consumers may react to lower interest rates by saving more so as to maintain their standard of living. On the contrary, some consumers may spend more if their income increases and they may spend less if their income drops.

Based on the latest news from RateCity, ANZ and NAB have reduced their savings rate again. The cutting of the savings rate intends to make financing at a lower cost for consumers and businesses. It also promotes spending and strengthening the economy.

Author: Shane

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