Why the end of the global bail-out is so good for savers | Report by Business.Scoop

Worldwatch: why the end of the global bail-out is so good for savers

Economists reach for superlatives when it comes to the newly reappointed chairman of the US Federal Reserve, Ben Bernanke.

No other chairman has presided over a US$1.2 trillion stimulus package or extended the grip of the central bank over financial markets like Bernanke has.

Like his counterparts in Europe and Asia, he has flooded international financial markets with cash over the last 12 months to thaw access to credit, support financial institutions and steer the world economy away from collapse.

He's expecting - and we're all hoping - that his second four-year term will be less about crisis management and more about managing away from crisis.

However he does that, one thing is clear: debt will remain out of favour, and savings should be better rewarded than they were during the credit-soaked 1990's and for most of this decade.

As to timing: on a whiteboard somewhere there's a line on a graph where the developed world's fiscal stimulus measures intersect with economic growth and cause inflation.

Current thinking puts that around mid-2010, when some economists are picking the Fed will raise its interest rate target from near zero at present to 0.5%.

The balancing act is to maintain price stability while avoiding raising interest rates too early and snuffing out economic recovery. Judging this right will be especially acute for governments that splurged to avoid deflation. They will be seeking the fiscal equivalent of a Jenny Craig weight-loss plan as soon as their economies look able to weather less government-led largesse.

In this environment, savers win. Governments that are spending less will force more capital to be sourced from private markets, pushing yields higher, as will any tightening of monetary policy to support fiscal restraint.

For New Zealand, the outlook is similar.

In June, Reserve Bank of New Zealand Governor Alan Bollard reiterated he doesn't see interest rates rising until the second half of 2010. Like Bernanke, he has plenty of time.

Annual inflation stays within his 1%-3% target range through 2011, according to RBNZ forecasts. The 90-day bank bill rate is seen averaging 2.8% in the year ending March 31, edging up to 3% in the following 12 months, implying no more than a 25 basis points increase to the official cash rate.

Yet there's potential for tightening to come earlier if others start moving. For example, the Fed didn't increase its US$300 billion Treasury note purchases as some had speculated it would on August 12, preferring to stretch out the programme for a month until October - an early sign of what's to come.

Competition for savings is likely to hot up further in this environment, making the outlook for continued "brutal" competition for deposits an ongoing feature of the New Zealand financial scene.

The one big risk is that governments will prove incapable of turning off the money tap as quickly as they must to avoid further instability emerging in world financial markets.

The politics of restraint is always difficult, and it will require a clear-eyed recognition among major debtor nations - the US in particular - that a second credit crunch will be the price of failure.

Those are very high stakes, with the acid on to allow recovering economic activity to take the place of fiscal stimulus as seamlessly as possible.

In all scenarios other than deflation, the outlook for savers remains bright. The competition for real money will only intensify as governments throttle back on the open chequebook approach of the last few months, and the world starts adjusting to life after easy credit.

Business.Scoop
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