Term deposits herald interest rate tumble?
by Andrew Willink
25 June 2008
The high interest rates offered by banks for term deposits are leading many investors on a merry dance, as the best deals switch from one money-minding term to another.
After the Reserve Bank of Australia (RBA) upped the cash rate from 7% to 7.25% in March, many banks did something unheard of for them - they offered term deposits at rates higher than the official cash rate. At first glance, it appeared unbelievable that the banks had chosen to lose money on the deal. Underpinning this decision was the cost of ’buying’ money from the wholesale market which was, and still is, under stress, thanks largely to the US sub-prime mortgage mess.
The banks decided ’retail’ money from everyday banking customers was a much cheaper option to fund their lending products. Hence, the specials offered for deposits dazzled all with their heady lures of high-sevens and low-eight percent returns for cash parked in term deposits.
However, we have noticed that deposit rates are on the downward slide. This could be an economic indicator that the banks think rates in general are in for a tumble. While this is great news for those with home loans, what does it mean for those who are cashed up and intent on making hay while the sun shines?
The big returns topping at 8.1%, once the domain of the 180-day term deposits are now disappearing. These have dwindled to between 3.65% and 4.55% from the four major banks. In the past two weeks, we have noted a few 90-day specials on offer at 7.75% and 7.8% but the high rates have moved to the longer terms. You can now get up to 7.9% for one year and up to 8.1% for two years. All is not lost though. Whilst the Westpac term deposit rate sits at 4.40% and ANZ term deposit at 4.50% other non major banks are still offering attractive rates, such as Bankwest’s 8.50% term deposit, the Raboplus term deposit at 8.25% and Defcredit’s term deposit at 8.00%.
The movement of special rate offerings from lower to higher terms can be interpreted as the banks shoring up their deposit base in the event that longer term funding remains shaky on a global scale. The Big Four’s now-lacklustre interest rates offered for term deposits of less than one year may reflect their confidence in the improvement of the Australian financial situation culminating in a fall in official interest rates. It will be very interesting to monitor developments.
Whether interest rates fall or stay at their current level, there is no substitute for shopping around. The majority of banks’ term-deposit business comes from specials and there are still great deals out there across all terms for those wanting to maximise returns on their cash. The trick is to be a savvy shopper, as specials appear out of the blue from all banks, large and small. Make a point to compare term-deposit rates on RateCity.com.au on a regular basis so you can strike at the right time and pocket a profit before interest rates fall.
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