By John Collett
Banks have started reducing their term deposit rates, with one slashing its one-year offering by more than half a percentage point. However, quick-acting savers can still lock in a decent rate before they fall further, with some competitive rates still available.
“The cuts to term deposit rates suggest the market could be at the peak of the interest rate hiking cycle; if that’s the case, these could be the highest term deposit rates we will see for a while,” says Rachel Wastell, spokesperson for comparison site Mozo. “If your term deposit is about to reach maturity, now might be the time to start exploring your options.”
Term deposit interest rates are falling fast.Credit: Glenn Hunt
It might be wise to look into locking in a new term deposit now, particularly for a longer term, Wastell says, as there is still an opportunity for savers to lock in a rate of almost 5 per cent for the next two to five years if you are sure you do not need access to those savings.
Last week, the Commonwealth Bank cut its 12-month rate by 0.6 percentage points, following cuts by Rabobank, Heartland and Macquarie Bank, among others, to their one-year rates of 0.4, 0.2 and 0.25 percentage points, respectively, since the start of this month.
More lenders have reduced their term deposit rates this week, with others expected to follow.
Lenders have also been reducing rates with longer terms than one year, indicating bank economists are expecting the next move by the Reserve Bank of Australia, when it comes, to be a cut in the interest rate.
However, it is important to keep in mind the possible downsides, Wastell says. Term deposits lock your money away for the full term and accessing those funds early might result in exit fees or a loss of interest, she says.
And, of course, no one knows for certain what will happen with interest rates, she adds.
Other factors that go into term deposit interest rate decisions include the extent to which the provider needs to raise more cash from savers and their competitive positioning.
Rates offered for term deposits and bonus savers can also differ, depending on their size.
Figures from Mozo show the best-paying one-year term deposits pay 5.1 per cent. The best two-year product pays 4.85 per cent and the best five-year rate pays 4.85 per cent, based on a deposit of $25,000.
There have not been nearly as many cuts to savings accounts’ interest rates as there have been to term deposits, Wastell says.
“Savings accounts are more flexible and can be adjusted more frequently, so we will likely see cuts to savings accounts only once the market is more certain that a cut to the cash rate is coming,” she says.
Rates will not likely be lower until next year with the Reserve Bank governor Michele Bullock further dampening expectations of a rate cut this year at an appearance before the House of Representatives’ economics committee last week.
The cash rate is sitting at 4.35 per cent, a 12-year-high, as our central bank seeks to reduce inflation which at 3.8 per cent remains well above the RBA’s target of 2 to 3 per cent.
Shane Oliver, chief economist at AMP, says the RBA could start to cut rates in February next year if, as he expects, there is slower growth, higher unemployment and lower inflation than the RBA currently forecasts.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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