Now is the time to lock in the interest rates on your term deposits, with the days of ‘big figure’ rates of 6% to 7% fast coming to an end. Headline rates are likely to slide to about 5%, or even 4%, possibly as early as next month.

There are three factors driving term deposit rates lower. Firstly, interest rates are falling. There has been a material move down in government bond market rates over the last few weeks, with the benchmark three-year government bond falling to 4.33%.

As chief economist Bill Evans from Westpac highlighted at the weekend, some leading economists now believe the Reserve Bank of Australia’s next rates move will be down rather than up. At Switzer, we have been in this camp for some months – the Australian (non resources) economy is struggling, the Australian dollar is too high, the property market is in the doldrums, and credit growth is anaemic. Notwithstanding the ‘jawboning’ of the markets by RBA governor Glenn Stevens, interest rates are not going up this year.

Secondly, the rates being offered on term deposits by banks to retail investors are unsustainable. Defying all laws of economics, a retail investor who invests $10,000 in a six month term deposit can get a rate that is 0.82% higher (5.8% vs 4.98%) than a wholesale investor (such as a fund manager) who invests $10,000,000 in the equivalent wholesale investment, the 180 day bank bill.

This situation is a legacy of the global financial crisis, where banks suddenly found that the wholesale markets were closed. Encouraged by the regulator, banks have since been in a fierce war to build their retail deposit base, and reduce their reliance on the wholesale deposit markets to fund their balance sheets.

The problem with this is that it can’t last forever. With credit growth in the economy slowing to a trickle, I expect retail rates to fall sooner rather than later. To understand how the spread between retail and wholesale rates has changed, the following graph shows the retail six month term deposit rate, the headline retail term deposit rate, and the wholesale 180 day bank bill rate, pre and post GFC. If we were to return to pre-GFC levels, retail rates would be up to 1% lower than wholesale rates!

 

The third factor that may have an impact on term deposit rates is the forthcoming change to the Commonwealth Government Guarantee, due to be implemented in October. While the government hasn’t yet announced the change, they have issued a discussion paper flagging that the guarantee is likely to be reduced from $1 million to between $100,000 and $250,000. Whether they will further restrict the type and maturity term of a deposit that will be eligible for the guarantee is an unknown. However, a number of the smarter operators around town are advising their clients to lock in some of the juicier term deposit offers now, particularly those from some of the credit unions or lower tier Authorised Deposit Taking Institutions, with the view that these will remain protected, in some form, by the guarantee. 

In my view, it’s time to lock in now. Some of the rates currently being quoted are:

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.