Tumbling term deposit rates

Tumbling term deposit rates

You wouldn't guess it from the way interest rates are normally discussed in the media, but almost two-thirds of households don't have a mortgage.

Which means despite all the hype, most Australians don't benefit directly from record-low borrowing costs, or the fact banks are clamouring to lend us money.

Indeed, people with savings in the bank have had a very different experience lately to borrowers, and it's not only the Reserve Bank's official cuts that have been causing them pain.

This week's graph shows that in the past six months, rates on term deposits have fallen by as much as 0.56 percentage points.

It's much more than the 0.25 percentage point cut in the cash rate, which is set by the Reserve, over the same period.

It also contrasts starkly with a few years ago, when banks were locked in a ''war for deposits'' and paying a hefty premium to get their hands on your savings.

So, why are savers now receiving such a raw deal? The unfortunate reality for people who depend on returns from deposits is that banks aren't competing as fiercely for your money as they once were - so they're paying less interest.

There are a few reasons for this. For one, it has recently become cheaper for banks to get funds from elsewhere. Overseas investors are willing to lend money to Australian banks more cheaply in response to increased optimism on financial markets, so banks are exploiting the opportunity.

As well, lending to households and businesses is still growing slower than in the past. This means the banks simply don't need huge amounts of funding from their deposit books. The upshot of all this is that they are paying less interest, to the point where returns from many products are negative once tax and inflation are taken into account.

According to figures from RateCity, ANZ, Commonwealth Bank and NAB have all trimmed their 12-month term deposits since November, even though official interest rates haven't moved.

Returns from many types of term deposits are now skinny indeed. Over a six-month term, for instance, Westpac, ANZ and Commonwealth Bank are all paying 2.5 per cent, which is already lower than the inflation rate of 2.7 per cent. It's a slightly better picture over 12 months, with the big four offering between 3.3 per cent and 3.35 per cent. But this is still pretty meagre once the taxman has taken a cut. It's still less than inflation if you're in a higher tax bracket.

All up, people with their money in term deposits have endured a double whammy of falling official rates and weaker competition between banks. This is a likely reason why more households are putting their savings to work in the sharemarket, or property, instead.

No one knows how long the weakness in term deposits will last. But if the market economists are right, things may not get too much worse from here.

After a surprise jump in inflation in the December quarter, most of the experts now think the next move in interest rates will be up, though it may not happen until the second half of this year.

And any rise in interest rates are likely to be very gradual, by less than 1 percentage point. It all suggests the glory days of 6 per cent one-year term deposit interest rates - last seen in 2011 - are a long way behind us.

But after several years of falling returns from term deposits, there is at least light at the end of the tunnel.

Tumbling term deposits