Following some pointed observations by RBNZ Governor Orr, the first banks should have already responded with term deposit rate rises.
On Wednesday, following the RBNZ +50 bps rise to the OCR, wholesale swap rates rose about +10 bps across the curve - suggesting markets had not fully priced the rise as had been expected. In the few days subsequently, these rates have continued to rise. And the hawkish commentary suggests that even more RBNZ rises are coming, despite the widespread feeling that we are nearing the end of this hiking cycle.
The RBNZ is forecasting that Q1-2023 CPI will rise to 7.3% in an unexpected extension, as a consequence of the impact of the rebuild after Cyclone Gabrielle, but they still expect inflation to fall away fast later in the year.
But so far, neither home loan rates nor term deposit rates have changed. This is quite unusual following an outsized RBNZ rate hike.
Record bank profits have attracted the ire of the RBNZ, with Adrian Orr calling banks out over their term deposit rates, saying they haven't kept up with the general rise in his benchmark rate changes.
He is right (as you would expect). Banks are now offering rates at a significant discount to inflation, and that is historically unusual. We noted the same impact when we recently reviewed bonus saver rates. But it is equally true of term deposit rates.
However, Orr's point isn't so clear-cut when current term deposit rate offers are related to the OCR. It is still 'true', just less so. (And as you can see, it wasn't true in the years before 2009.)
From 2009 to 2020 banks pitched their six month term deposit rate at about +150 bps above the OCR. Since, the pitch has been barely +50 bps.
For their one year TD rate, the historic pitch has been a little higher, just under +200 bps with the recent levels more like +100 bps.
On that basis, it seems like the current six month term deposit offers should be more like 1% higher than they currently are. Which is basically Orr's point.
However, we should also note that the variances in the above charts are compared to the average of all banks. If you only focused on the five main banks, the variances would be larger. You can assess the 'penalty' for supporting a main bank from the table below. No main bank offers market leading term deposit rates. They may do for home loan rates, but not for savers.
There is one bank that does offer a higher term deposit rate at present. That is SBS Bank and their one year 6% rate. Rabobank comes close. But SBS Bank's offer is a full +60 bps higher than any main bank.
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, especially if you are in the 39% tax bracket - PIEs are taxed at 28% flat.
The latest headline rate offers are in this table after the recent increases.
| for a $25,000 deposit February 25, 2023 |
Rating | 3/4 mths |
5 / 6 / 7 mths |
8 - 11 mths |
1 yr | 18mth | 2 yrs | 3 yrs |
| Main banks | ||||||||
| ANZ | AA- | 3.80 | 4.70 | 5.15 | 5.30 | 5.25 | 5.20 | 5.10 |
 |
AA- | 3.80 | 4.80 | 5.20 | 5.30 | 5.25 | 5.25 | 5.30 |
 |
AA- | 3.80 | 4.80 | 5.20 | 5.30 | 5.25 | 5.25 | 5.25 |
 |
A | 3.80 | 4.80 | 5.10 | 5.40 | 5.25 | 5.25 | |
 |
AA- | 3.80 | 4.70 | 5.10 | 5.30 | 5.25 | 5.25 | 5.25 |
| Other banks | ||||||||
| China Constr. Bank | A | 3.95 | 5.10 | 5.50 | 5.75 | 5.35 | 5.35 | 5.35 |
| Co-operative Bank | BBB | 3.80 | 5.10 | 5.20 | 5.45 | 5.35 | 5.30 | 5.30 |
| Heartland Bank | BBB | 3.90 | 5.00 | 5.70 | 5.70 | 5.25 | 5.25 | 5.25 |
| HSBC | AA- | 3.70 | 4.75 | 5.10 | 5.30 | 5.15 | 5.10 | 5.10 |
| ICBC | A | 4.20 | 5.10 | 5.50 | 5.75 | 5.40 | 5.35 | 5.30 |
 |
A | 3.90 | 5.20 | 5.75 | 5.85 | 5.55 | 5.30 | 5.30 |
 |
BBB | 3.20 | 4.55 | 5.00 | 6.00 | 5.25 | 5.25 | 5.25 |
 |
A- | 3.80 | 5.00 | 5.15 | 5.40 | 5.20 | 5.25 | 5.25 |
Term deposit rates
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17 Comments
"Did the banks get Orr's message?". Of course. But they don't have to do anything if they choose not to.
Unless they are made to act, why would they? Unless, and until, the commercial banks have to respond on a price basis - no matter how that is engineered - then they can be ambivalent.
Allow New Zealand qualified citizens to open a Call Account with the RBNZ as a price based alternative to the commercial banks, and let's see how long they thumb their noses at Mr Orr.
Exactly. Or the rates on Kiwi Bonds could be pushed up to force the issue.
I would have thought by now that people might have recognized that 'suggesting' to commercial entities that they do something is as effective as 'self regulation' is at protecting the individual from the activities of polluters.
For what it's worth - Kiwibank are offering a 5% for 6 month rate from Monday as a special.
Now that the FLP has ended, Orr can get away with criticising banks' low deposit rates without looking like quite so much of a hypocrite, but the fact still remains that banks have had access to billions in cheap funding courtesy of the Reserve Bank. They don't need to offer savers a decent rate of return, at least not yet.
I'm hoping to see treasury increase Kiwi Bond rates soon, and by a fair bit. This will at least expose banks for not offering a premium on the risk-free rate of return.
I would use a much stronger phrase when saying that Orr can now change his tune. I would not let him off lightly. I think he has done NZ a huge dis-service and has shown extremely poor judgement.
In instigating this and carrying it on like he did, Orr has been robbing retail depositors and has been subsidizing bank shareholder with excessive profits. For a very long period of time.
If you think about $ as just another product it could be just the current supply vs demand situation for $ as well.
No big demand for people borrowing (I think I saw somewhere there was a big drop off in mortgages in Jan compared to other years) so the banks don't need to get more raw product in the door given their current stocks.
Perhaps this gives us a clue as to what's coming? (Via CH Smith). If so, the banks may have little choice but to 'do as they're told'.
Why would bonds lose value? As the demand for buyers of newly issued bonds explodes higher (to fund deficit spending), bond yields rise globally as nations compete for the dwindling pool of capital willing to buy potentially risky bonds. As bond yields rise, the value of all existing bonds tumbles off the cliff.
The only real mechanism that the Reserve Bank has to control interest rates is through adjusting the level of reserves that the banks hold. Government budget deficits or QE will increase reserves and put downward pressure on interest rates while bond issuance or budget surpluses will reduce reserves and raise rates. The Reserve Bank can also pay a support rate on reserves and alter the interest rate it charges the banks for reserves if they run out.
Standard and Poor's gives us a good description of the mechanism here. https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
The act of lending creates new deposits and banks don't lend out their deposits anyway. They need to maintain their deposits relative to lending or their reserves will all end up in the exchange settlement accounts of the other banks and they will then either have to borrow them back again or borrow more from the Reserve Bank and this is more costly. They also need to maintain a balance for reasons of equity.
Because they are getting cheaper funding from overseas. One bank has had a special cheap lending rate on the downlow with brokers apparently not permitted to say the name of the bank until recently. But the lending rate was under 5% . Shows the RB don't have that much control over inflation if OCR increases aren't being reflectedin lending and deposit rates. They made a big error imo continuing with the FLP for so long. Now banks have found cheaper funding elsewhere anyway.
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