No option for savers as banks cut deposit interest rates

Banks have slashed interest rates on term deposits so severely that customers have ‘no options’. See all the rate cuts since May.

Retirees and savers are being urged to look for better deals after the major banks slashed interest rates on term deposit products so severely that customers have “no options” for an interest rate that beats inflation.

Fresh data from the nation’s largest bank, submitted to the House of Representatives economics committee and obtained by The Australian, reveals Commonwealth Bank has slashed interest rates on a range of term deposits far in excess of the Reserve Bank’s 75 basis point reduction in the official cash rate since May.

Interest rates on CBA term deposits with a tenure of between two and four years have been hacked by between 85 and 95 basis points – more than the RBA rate cut and enough to push the interest paid on the term deposits to just 1.25 per cent, well below the rate of inflation. Interest rates paid on one and two-month deposits were slashed by 95 basis points. Read more: Why you can’t bank on dividends | Banks’ dividends in focus

The figures are contained in a response to a question on notice asked of all major banks by the chair of the economics committee, Liberal MP Tim Wilson.

Rate cuts since May 31

While CBA has been the only lender to reply so far, the figures show the highest rate offered on a term deposit is 1.5 per cent for an eight-month deposit – still below the inflation rate of 1.6 per cent.

“It’s important to match the theory of interest rate cuts against the practical real-world consequences – does it lead to stimulus? And if so by whom?” Mr Wilson told The Australian.

“The data raises questions about the efficacy of interest rate cuts when they’re matched against reduction of term deposit rates.

“Until we understand the practical consequences of existing cuts the RBA should be cautious about further cuts.”

As the major banks prepare to reveal an expected combined full-year profit after tax of $27bn as they file their accounts over the next two weeks, an analysis of savings rates offered by the big four shows no term deposit will reward customers with a rate above inflation of 1.6 per cent.

Documents obtained by The Australian last week revealed Treasury advised the government the central bank could offer cheap funding to the major banks to stimulate the economy.

The campaign of quietly cutting rates offered to savers in the wake of the latest RBA rate cut means savers could be losing money by holding cash in what are generally considered the safest form of investment.

The major banks have copped political wrath by passing on an average of just 57 basis points to mortgage borrowers in a market worth $2 trillion, of which the big four banks command an 80 per cent share.
The difference between the RBA rate cuts and those passed on by the banks is more than $500 a year for average owner-occupier home loans, but the sector has argued withholding some of the RBA rate reduction was used to maintain higher interest for depositors and savers.

Vadim Taube, the CEO of financial comparison site InfoChoice, said the best term deposit option for savers was an ANZ special offer of 1.6 per cent. Westpac’s best deal was a paltry 1.3 per cent per annum on a three-month term deposit.

“Savers who don’t want their money to lose value need to compare their rate with savings rates from outside the big four banks,” Mr Taube said.

“There are now no options from the big four banks for savers who want a rate significantly above the current consumer price index of 1.6 per cent,” he said.

ANZ will be the first major lender to open its accounts and is expected to unveil a $6.5bn full-year profit on Thursday. The following week, Westpac will unveil a $6.8bn full-year profit, followed by an expected $5bn from National Australia Bank. Commonwealth Bank, which operates on a different calendar, reported an $8.7bn full-year earnings result in August.

Data provided to The Australian shows the big four have slashed term deposit rates by between 35 and 55 basis points since the RBA began cutting the cash rate in June, leaving a range of generic 12-month deposits paying between just 0.9 and 1.45 per cent.

According to InfoChoice, the best rate offered at an everyday access account was Westpac’s Life account, which offered customers 1.65 per cent, a whisker above inflation.

However, the bank has cut rates on its Community Solutions Cash Reserve account – used by many sporting clubs, associations and grassroots community groups – by up to 0.2 per cent to just 0.55 per cent per annum.

The figures highlight how banks are pulling every lever as they try to preserve profit margins in an ultra-low interest rate world. Banks need to continue to attract deposits, but this becomes tougher as the cost of money moves steadily closer to zero.

Interest rates on term deposits have sunk to their lowest levels since the 1950s.