Are term deposit rates likely to increase?
Chris Tennent-Brown, ASB Senior Wealth Economist discusses the current outlook for term deposit rates.
Investors who are looking to invest for shorter terms may be keeping a close eye on the current term deposit rates. From an economist’s perspective, our forecast is that interest rates for term deposits will stay low for the foreseeable future. The key reason for this is because of the current low inflation environment in New Zealand.
An essential factor underpinning interest rates for popular short term investment terms (up to around a year) is the Reserve Bank Official Cash Rate (OCR). The Reserve Bank uses the OCR as one of the economy levers to control inflation, which it targets to be around 2% per annum. Currently in NZ, inflation is sitting at 1.7% per annum and therefore we are not expecting the Reserve Bank to change the OCR significantly in the near future.
The good news
However, low interest rates are not all bad for investors. The flip side of low term deposit rates is that the return paid (i.e. the interest earnt on your investment) is not being eroded by high inflation as it has been at times in the past.
Let’s look at an example.
In June 2010, an investor who made a 1-year term deposit would have likely received a term deposit rate of around 5.3% p.a. While this sounds like a good rate by today’s standards, inflation was also 5.3% p.a. (in part due to a GST increase). Once tax has been deducted on the return, the investor actually went backwards over the year in terms of purchasing power, even though the carded rate of 5.3% p.a. probably seemed reasonable at the time. That example is an extreme for recent years, but does show how a high return can get eroded by inflation.
In today’s environment, our lower inflation rate of 1.7% p.a. means that real ‘returns’ (after inflation) have remained positive.
For investors who don’t want to commit to the longer terms which are paying higher rates, some of the special rates on shorter terms are a way of obtaining a higher return. The Starship term deposit return is 3.60% p.a. for 8 months, and also helps raise funds for Starship’s Emergency Department. For every customer who takes out the 8 month Starship term deposit special during the promotion, ASB will donate $25 to Starship up to a total donation amount of $150,000. The 3.60% p.a. return is higher than the 6 month and 12 month rates of 3.35% p.a. and 3.25% p.a. respectively. For investors it is a good way of getting a higher return and supporting a good cause. Find out more information here.
We expect term deposit rates will eventually lift over the years ahead, but we also expect inflation to pick up too. Taking both inflation and our interest rate forecasts into account, real term deposit rates should lift modestly over the years ahead. But at this stage we do not expect to see interest rates return to the levels we saw prior to the Global Financial Crisis.
Higher returns and some protection against inflation are possible through longer-term investments and diversification into different assets. However, investors need to be sure those investments suit their needs, by talking to an advisor. You can find out more about ASB’s Wealth Advisory Service here.
This material has been prepared for informational purposes only and may not be suitable for all investors. Before acting on this information, you should consider the appropriateness and suitability of the information, having regard to your objectives, financial situation and needs, and, if necessary seek appropriate professional or financial advice. Any opinions or conclusions expressed in this material are subject to change without notice and may differ or be contrary to the opinion or conclusions expressed elsewhere by ASB Bank Limited. Any projections and forecasts are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Different assumptions and estimates could result in materially different results. ASB does not represent or warrant that any of these projections or forecasts, or any of the underlying assumptions or estimates, will be met. Neither ASB nor any person involved in the preparation of this material accepts any liability for any loss or damage arising out of the use of all or any part of this material.
ASB terms apply to the Starship term deposit special, available until 24 September 2017. Minimum deposit $10,000. Rate not available to financial institutions. Term deposit rate and term may change. One donation per customer. ASB maximum donation of $150,000.
ASB Wealth Managers' disclosure statements are available on request and free of charge from your ASB Wealth Manager.