Comparing New Zealand and Australian term deposit interest rates

Personal Finance / analysis

There are still substantial interest rate advantages in holding New Zealand term deposits, compared to the 'safety' advantages of holding Australian term deposits. But Australian rates may be our future

29th Jul 22, 6:42am by David Chaston

Term deposit rates are rising in New Zealand. How long that trend will continue is anyone's guess.

But as rates become more attractive - even if they are below current inflation rates - two things stand out.

Firstly, we still don't have any official deposit guarantee protection. It is coming, but not due until some time in 2023.

And secondly, New Zealand rates are far more attractive than Australian term deposit rates - where they do have a Government guarantee.

In Australia, combined balances up to AU$250,000 per account holder (NZ$278,000) are guaranteed by the Australian Government.

As regular readers will know, we have noted the moral hazard involved in Government guarantees. The RBNZ used to be worried too, until Governor Orr arrived and accepted the new Labour Government's position to add this type of 'protection' for New Zealand bank account savers.

Savers should be prepared for a sharp fall in interest rate offers. That is because the cost of the 'guarantee' will be passed back to them in the form of lower returns (even if not immediately and directly). State guaranteed returns become risk-free, and so it will be a natural transition for term deposit rates to fall to risk-free levels when they are guaranteed. Risk-free is currently what is offered for Kiwi Bonds. Interestingly, these have risen sharply at the short end today.

Here is a workup of how term deposit rates compare currently between unguaranteed New Zealand, and guaranteed Australia.

The latest headline rate offers are in this table after the recent increases.
for a $25,000 deposit	Rating	3-4	5-7	8-11	1	18	2	3
July 28, 2022		mths	mths	mths	year	mths	yrs	yrs
		%	%	%	%	%	%	%
New Zealand	no Govt guarantee
ANZ	AA-	1.90	2.95	3.30	4.00	4.05	4.10	4.20
ASB	AA-	1.85	2.85	3.00	3.90	4.00	4.10	4.35
BNZ	AA-	1.85	2.85	3.30	3.90	4.00	4.10	4.35
Westpac	AA-	1.80	2.75	2.95	3.65	3.80	4.10	4.30
		-------	-------	-------	-------	-------	-------	-------
Main bank average		1.85	2.85	3.14	3.86	3.96	4.10	4.30

Australia	A$250,000 Govt guarantee
ANZ	AA-	0.35	0.85	1.05	1.25	1.25	1.50	1.75
CBA	AA-	0.35	0.80	1.05	1.20	1.25	1.45	1.70
NAB	AA-	0.45	0.85	1.15	2.45	2.45	2.00	2.00
Westpac	AA-	0.40	0.80	1.10	1.10	1.10	1.50	1.75
		-------	-------	-------	-------	-------	-------	-------
Main bank average		0.39	0.83	1.09	1.50	1.51	1.61	1.80

The NZ advantage
ANZ/ANZ		1.55	2.10	2.25	2.75	2.80	2.60	2.45
ASB/CBA		1.50	2.05	1.95	2.70	2.75	2.65	2.65
BNZ/NAB		1.40	2.00	2.15	1.45	1.55	2.10	2.35
Westpac/Westpac		1.40	1.95	1.85	2.55	2.70	2.60	2.55
		-------	-------	-------	-------	-------	-------	-------
Average advantage		1.46	2.03	2.05	2.36	2.45	2.49	2.50

You may also wish to adjust for the difference is official policy rates, which is +1.15% being the difference between the RBNZ's 2.5% OCR and the RBA's current 1.35% Cash Rate Target (although it may go to 1.85% next Tuesday, August 2, 2022 - so the difference will then become just 0.65% and which markets have probably already priced in).

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15 Comments

by Solid_Granite | 29th Jul 22, 7:12am 1659035524

Wow that is a stark difference. But Australia's cash rate is 1.35%, while ours is 2.5%, almost double, so that probably has a lot to do with it too. To be honest I'd rather have a lower return rate with risk free status on my deposit.

by Carlos67 | 29th Jul 22, 11:27am 1659050852

You cannot live your life trying for zero risk on everything. By the time banks fail in NZ we will be at Armageddon status and it will be every man for himself.

by Tom Joad | 29th Jul 22, 7:12am 1659035542

Anyone know whether the promised deposit guarantee will extend to second tier banks (Co-Op, Heartland, TSB etc) or will it just be the big 5?

by Trickledown | 29th Jul 22, 8:48am 1659041281

I understood it to be for all or most deposit takers. But check RBNZ website!

by Tom Joad | 29th Jul 22, 10:35am 1659047731

Thanks for that.

It looks like it will cover all deposit takers including building societies and finance companies.

I guess that's going to pretty much flatten the interest rates across the cohort.

by fortunr | 29th Jul 22, 11:54am 1659052441

Watch out - at actual implementation time, it might happen that the "Guarantee" gets restricted only to deposit takers with a credit rating over a particular threshold (such as S&P's BBB-), or maybe only to newly created deposits after a particular day, or something like that. Yes, there was no mention of it in the original announcement, but you can not trust this Government nor the current muppets at the helm of the RBNZ, so you might want to be a bit cautious before relying on this. Also, you cannot blindly trust the declared expected timing of its implementation - there might be delays to it, and considering the track record of this government, you'd better be pretty cautious about it.

by kiwikidsnz | 29th Jul 22, 3:33pm 1659065611

Also consider the track record of the next Government - Key's National brought in the OBR regime

by WellingtonInvestor | 30th Jul 22, 12:18am 1659097117

Would a new deposit just be the same as moving cash from one bank into another? Or from one account to another.

by WellingtonInvestor | 29th Jul 22, 2:45pm 1659062743

The stupid thing is that you can get better returns from Kiwibonds for 6 months than you can with many of the banks, including 2nd tier ones. Banks need to up their game.

by phalanax | 29th Jul 22, 8:03am 1659038627

Yet to see if NZ will proceed in rolling out a deposit guarantee scheme 2023 was touted , anyone know if they have finalised a date. 100K is still short of the 250k Ozzies enjoy....US fed aiming progressively for +3% OCR...the Ozzies might get caught dragging their chain .... OZ banks could be much more exposed to RE pressures as some of their lending practices have been subject to recent inquiry... havent they got 'interest only' rollover issues?

by Tangata_Pono | 29th Jul 22, 11:00am 1659049239

One has to assume that the funding for lending programme will be holding New Zealand's term deposit rates down given the funding subsidisation effect that is creating.

by Tim Depositor | 29th Jul 22, 12:33pm 1659054802

What's this paranoia about the retail banks going bust. Keep off the grass, mate.

It's the investment banks, like Macquarie, that caused the worry during GFC. That's why government had to guarantee deposits.

by phalanax | 29th Jul 22, 4:23pm 1659068600

Not paranoia about banks going bust rather a case of OZ banks cheaper TD rates perhaps being tied down by wanting to limit mortgage risk exposure .

by chebbo | 30th Jul 22, 6:01pm 1659160894

As mentioned in the article, there's a bit of a moral hazard involved with deposit insurance. In fact, deposit insurance is a bit of a misleading term, since it implies that the primary benefit is for depositors.

Deposit insurance is more like a government underwrite for bank assets. Banks get away with paying less interest on deposits, are incentivised to play fast and loose with them, and reduce their risk of a bank run since everybody assumes the deposits will be safe with the bank even in the event of a default. Depositors have their deposits guaranteed, but only insofar as the government is able to cover them, and even if they can, it's the tax-paying public who picks up the bill anyway. There's no way the government coffers are flush enough to cover deposits in the even of systemic bank failure. It will be borrowed money, and essentially equivalent to a bailout.

If deposit insurance is introduced, bank capital requirements must be increased as well in order to compensate for this. We all know how much the banks will like that idea. I'm also confused as to how deposit insurance is supposed to reconcile with the existing OBR scheme. It would either have to be replaced, or some weird compromise introduced where everything under $100k is insured, but everything over that amount if guaranteed to be lost.

KiwiBonds already exist. Cut out the middle-man and get a risk-free rate of return without all the moral hazard.

by WellingtonInvestor | 2nd Aug 22, 11:36pm 1659440218

Kiwibonds are already 3% for 6 months, which is a better rate than many of the banks, so IMO it makes a lot of sense to make it easier for people put money into them.