Updates: The table below has been updated with the Wednesday increase in BNZ's term deposit offers - which matched the earlier ANZ levels. Westpac has raised rates similarly too, also in the table below now.
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We are now getting more chunky term deposit rate increases, including from the main banks, so an update of where they have risen to seems in order.
ANZ's recent shift higher probably signals a broader shift by all banks.
As we have noted previously, bank term deposit rates have some catching up to do. But there are some practical financial market constraints in play, two in particular: the cost of wholesale money, and the level of new loan demand. Both will work to limit how much banks will be prepared to offer savers for their term deposits.
Another factor at play is saver behaviour. Over a very long history, New Zealand savers have shown serious reluctance to place funds on deposit for longer than 12 months. The most popular terms are currently 6-9 months. Given that banks have mostly turned themselves into mortgage banks, they need long term funding, and savers don't offer that.
The other handicap savers give themselves is that they don't shop around. Banks know that and rely on it. They even factor it in to their liquidity management. They measure the "replicating portfolio" - the part that just rolls over on a regular, consistent basis - and they have found that this is by far the largest portion of their retail funding. History shows they can rely on it. That is considered by them to be a safe 'long term' base that is always there.
So savers shoot themselves in the foot collectively by being paid for short term rates when in fact they will leave their funds at their bank long term.
There is a deep-seated psychological aspect to saver behaviour as well. They tell themselves "I might need these funds soon" to justify short TD commitment periods. But again, a bank looks at the overall pattern and most savers don't actually touch those funds. Savers are naturally conservative, and that psychology works against them because they rate negative risk far higher than positive returns.
We saw during 2020 and 2021 where savers shifted 20% of their term deposit balances to savings or transaction accounts in a 'fear' move triggered by the pandemic. That clearly benefited banks by dropping their cost of funds from retail sources. But a bank treasurer would also have looked at those term deposit balances and noted that 80% stayed there even in those circumstances, most on 90/180/270 day terms. That is a very juicy replicating portfolio, even in the toughest of circumstances.
If savers won't respond to higher long term TD rates, why would banks offer higher rates for short term balances?
We see 4% plus offers for two years and longer now. It is unlikely they are attracting much interest from savers, even as they shift those transaction and savings balances back to term deposits. We will even see "5%" or higher long term offers soon. They will grab attention, but really only operate as a marketing enticement to start a conversation with savers. There is no downside for the bank.
It is not as though "proper" investors shun long term fixed rate investors. ASB was the latest retail bank to tap bond markets within the past week, wanting to raise $100 million for a five year term with identical security and risk as offered term deposit savers. Those 'professional' investors absolutely piled in, offering more than $750 million which ASB took. And they're paying them 5.524% per annum. ASB offers its term deposit savers 4.00% for five years. Go figure.
Think about that for a moment. ASB is paying its bond investors $11.4 million more per year than it would pay its term deposit investors for the same term. Or, that is what term deposit investors are giving up by collectively shunning the long end of the TD market, letting it languish as an uncompetitive zone for banks.
Obviously no one saver can do anything about that. But this is a clear consequence of overall saver psychology.
An easy way to work out how much extra you can earn is to use our full function deposit calculator. We have included it at the foot of this article. That will not only give you an after-tax result, you can tweak it for the added benefits of Term PIEs as well. It is better you have that extra interest than the bank (and especially if you are in the 39% tax bracket - PIEs are taxes at 28% flat).
The latest headline rate offers are in this table after the recent increases.
| for a $25,000 deposit June 21, 2022 |
Rating | 3/4 mths |
5 / 6 / 7 mths |
8 - 11 mths |
1 yr | 18mth | 2 yrs | 3 yrs |
| Main banks | ||||||||
| ANZ | AA- | 1.80 | 2.75 | 2.90 | 3.65 | 3.70 | 4.05 | 4.10 |
 |
AA- | 1.65 | 2.50 | 2.70 | 3.15 | 3.30 | 3.60 | 3.80 |
 |
AA- | 1.80 | 2.75 | 2.90 | 3.65 | 3.70 | 4.05 | 4.10 |
 |
A | 1.75 | 2.65 | 2.80 | 3.20 | 3.65 | 3.80 | |
 |
AA- | 1.80 | 2.75 | 2.95 | 3.65 | 3.80 | 4.10 | 4.30 |
| Other banks | ||||||||
| China Constr. Bank | A | 1.90 | 2.95 | 3.15 | 3.55 | 3.65 | 3.90 | 4.20 |
| Co-operative Bank | BBB | 1.30 | 2.50 | 2.70 | 3.15 | 3.30 | 3.60 | 3.80 |
| Heartland Bank | BBB | 1.75 | 3.00 | 3.00 | 3.60 | 3.60 | 3.60 | 3.80 |
| HSBC | AA- | 1.40 | 2.20 | 2.40 | 2.85 | 3.40 | 3.60 | |
| ICBC | A | 2.00 | 3.00 | 3.25 | 3.70 | 3.70 | 3.95 | 4.25 |
 |
A | 1.85 | 2.90 | 3.10 | 3.50 | 3.60 | 3.85 | 4.15 |
 |
BBB | 1.65 | 2.50 | 2.70 | 4.00 | 3.30 | 3.65 | 3.80 |
 |
A- | 1.65 | 2.50 | 2.80 | 3.15 | 3.40 | 3.60 | 3.80 |
Term deposit rates
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23 Comments
David has raised here many good points indeed. Good article. Maybe he should have taken the opportunity to highlight that the best approach to risk minimization is appropriate asset class allocation and diversification, based of course on the time horizon and profile of the individual investor. In general, keeping everything as TD's does not minimize overall risk.
Find it a bit weird the constant bank bashing on low term deposit rates. I think people need to realise that if you have a large chunk of change earning what I consider is free money then you will be more than happy when rates hit 5% for the 1 year by Christmas. The way other so called Investments are tanking of late your more interested in just the return of your investment rather than returns on your investment.
Wonder how many moaning TD holders made their gains from selling overly inflated housing. The next person carries the mortgage around their neck. Maybe the TD holders could look their gift horse in the mouth and ask them to pay higher mortgage rates to compensate their measly TD rates.
Even after these falls the NZX50 is up 40% in the last 5 years, and 200% in the last decade. Anyone who sat with all their cash in term deposits over this time has fall behind those with a diverse portfolio.
You are trading the short term volatility risk for the long term risk of inflation eating away at your nest egg. If you are spending the income from term deposits you will look back in ten years and realise your 'free money' doesn't buy as much as it used to.
I heard a lovely phrase recently - investment risk cannot be created or destroyed. It can only be transferred from one form of risk to another.
Interesting viewpoints. Ultimately banks don't want savers as they are not profitable. So we don't see any competition. The banks really only offer them due to regulatory capital requirements.
I imagine the savers would react differently if we saw one bank permanently sitting at 50-100 basis more than their competition.
Given the 5 year for most banks is 4%, and we are likely to be at that rate or higher in on-call accounts by the end of the year, why would you lock it away? You will likely be losing money on 4 of those years.
Surely it means that people with money are investing it in other places: rental houses, sharsies, pension funds, private investment funds etc and not in bank TDs.
Bit short sighted of the banks not to find ways to divert this money into TDs... as the rates offered are too low vs other safe investment options.
So - the question would be, as a % of total investments how much in NZ is in TD's vs other investment options. and how does that compare with overseas markets.
We know we have been skewed towards housing, the success of sharsies shows that people are keen to try different options... so i suspect if banks improved their offerings, more people would deposit more money?
This is a clear consequence of investor behavior, not savers'. In the past few years it's been very profitable to get into huge debt (until it suddenly wasn't) and banks knew it and fed off it. They changed their whole business model to feed off it, and neglected savers. But as we've seen things are rapidly changing.
I think the government and reserve bank's mistake was relying on commercial banks to regulate the economy and look after money, as if they weren't just out to make a big profit for themselves.
Great and interesting article which I think makes some fair calls but it misses a few key points too:
- Extraordinary RBNZ direct funding support to banks has also played a significant part in keeping real interest rates unappealing for traditional savers. And with inflation where it is, it is still unappealing, particularly after tax.
-Wholesale fixed income investors are more constrained in what they can invest in and are often only interested in outperforming a benchmark index. They therefore see value much differently.
- As someone else mentioned, the cost of operating a retail funding base is not trivial compared to a wholesale fund borrowing programme. Banks would, therefore pay less for retail deposits than bonds, all else being equal.
- The willingness of retail depositors to switch TDs is constrained by the pain the awse AML requirements they make you jump through - a regulatory barrier to competition.
- Although currently there is no government guarantee and OBR for retail depositors, it might be reasonable to suggest that they would get looked after ahead of senior unsecured bondholders in an event of market stress, like all those voters in Timaru and Ashburton when South Canterbury Finance collapsed. i.e. wholesale funders get shafted and should demand more compensation.
- It is true that retail depositors tend to invest short because of liquidity preferences (not withstanding their dim view on the attractiveness of longer TD rates) and therefore are willing to accept a lower return for that relative liquidity. That they, on average tend to roll over their TDs and would therefore be better off, on average, to invest longer term, that does not hold for the individual who may or may not need the liquidity.
- Related to the above, break 'costs' for TDs are skewed in the bank's favour. The longer the TD the more chance of breaking it and the more chance of losing the opportunity cost.
It is benificiary to shop around. This week a ANZ term did mature and our initial plan was to shift it to a competitor offering a better rate (SBS Bank). After hearing about the competitors offer ANZ immediately raised their proposed rate to match it. So we stayed!
Great article, and I think this is the key point:
Obviously no one saver can do anything about [low TD rates]. But this is a clear consequence of overall saver psychology.
People don't tend to have enough savings for a difference of %1 here or there to make much of a meaningful impact on their decisions, at least not on an individual level. Investors pool funds to both spread risk and increase leverage. If savers got together to do the same thing, then perhaps banks would pay attention
I wonder - if people started moving their KiwiSavers to conservative/cash funds in anticipation of further stock market falls, would this put some pressure on banks to increase their TD rates? Or has everyone already bet that money on the housing market?
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