Term deposit rates are rising in New Zealand. And savers are chasing those higher rates, as we can see from the fast-recovering term deposit balances (S40).
But restrained loan demand means that banks have been equally restrained in chasing more deposit market share with higher interest rate offers than their rivals.
We can see that restraint in a number of ways, but one is to view the premium New Zealand terms deposits have over their equivalent Australian rates.
This premium has shrunk in the past six months.
The premium to "risk-free" (like the Treasury Kiwi Bond rates) has shrunk too, but that is partly because Kiwi Bond rates have jumped recently.
New Zealand savers at banks still have advantages over their Australian counterparts, but they are less going into 2023.
And of course, everything is negative after tax and after inflation - but perhaps less negative than it has been in a long time.
That negativity will depend a lot on the next CPI result to December 2022, which will be released on January 25, 2023. One component that will tend to reduce the September 7.3% pa rate will be the petrol price. That has dropped by -12% in the quarter, and is down -7% from a year ago. A lower December CPI will help savers tolerate the higher face term deposit interest rates even better.
Here is a workup of how term deposit rates compare currently between unguaranteed New Zealand, and guaranteed Australia.
| The latest headline rate offers are in this table. | ||||||||
|
for a $25,000 deposit
|
Rating | 3-4 | 5-7 | 8-11 | 1 | 18 | 2 | 3 |
| January 10, 2023 | mths | mths | mths | year | mths | yrs | yrs | |
| % | % | % | % | % | % | % | ||
| New Zealand | no Govt guarantee | |||||||
| ANZ | AA- | 3.20 | 4.55 | 5.00 | 5.20 | 5.20 | 5.25 | 5.25 |
| ASB | AA- | 3.20 | 4.45 | 5.00 | 5.20 | 5.20 | 5.25 | 5.30 |
| BNZ | AA- | 3.20 | 4.50 | 5.10 | 5.20 | 5.20 | 5.20 | 5.20 |
| Westpac | AA- | 3.20 | 4.60 | 5.00 | 5.25 | 5.25 | 5.25 | 5.25 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average - NZ | 3.20 | 4.53 | 5.03 | 5.21 | 5.21 | 5.24 | 5.25 | |
| Australia | A$250,000 Govt guarantee | |||||||
| ANZ | AA- | 2.00 | 2.55 | 2.55 | 4.00 | 4.00 | 4.00 | 4.00 |
| CBA | AA- | 1.95 | 2.45 | 2.45 | 3.70 | 3.70 | 3.95 | 3.95 |
| NAB | AA- | 2.00 | 2.55 | 3.75 | 3.75 | 4.00 | 4.00 | 4.00 |
| Westpac | AA- | 1.60 | 2.10 | 2.10 | 3.85 | 3.85 | 3.85 | 3.85 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average - AU | 1.89 | 2.41 | 2.71 | 3.83 | 3.89 | 3.95 | 3.95 | |
| The NZ advantage | ||||||||
| ANZ/ANZ | 1.20 | 2.00 | 2.45 | 1.20 | 1.20 | 1.25 | 1.25 | |
| ASB/CBA | 1.25 | 2.00 | 2.55 | 1.50 | 1.50 | 1.30 | 1.35 | |
| BNZ/NAB | 1.20 | 1.95 | 1.35 | 1.45 | 1.20 | 1.20 | 1.20 | |
| Westpac/Westpac | 1.60 | 2.50 | 2.90 | 1.40 | 1.40 | 1.40 | 1.40 | |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Average advantage | 1.31 | 2.11 | 2.31 | 1.39 | 1.33 | 1.29 | 1.30 | |
| July 2022 advantage | 1.46 | 2.03 | 2.05 | 2.36 | 2.45 | 2.49 | 2.50 | |
You may also wish to adjust for the difference is official policy rates, which is +1.15% being the difference between the RBNZ's 4.25% OCR and the RBA's current 3.10% This is the same difference that applied when we last looked at these comparison in July 2022. The RBNZ and the RBA have raised their policy rates by the same amount over the intervening six months.
The fact that the NZ advantage has shrunk in that time could be because we are that much closer to having a deposit guarantee in New Zealand. Banks will 'pay' the NZ Government for that (just like they do in Australia), and that deposit guarantee cost will be essentially covered from the interest rate offered.
The New Zealand Depositor Compensation Scheme is being prioritised ahead of the rest of a range of other regulatory changes and is expected to be up and running in early 2024. Then, New Zealand term deposits essentially become risk-free. It seems unlikely any bank will fail between now and 2024, so the shift to 'risk-free pricing looks like it is underway. Slowly. So no one really notices.
Recall, we do have risk-free term deposits available now in the Treasury's Kiwi Bond offers. These are currently priced like this:
| 6 | 12 | 24 | ||||||
| mths | mths | mths | ||||||
| % | % | % | % | % | % | |||
| Kiwi Bonds | AA+ | 3.75 | 4.25 | 4.25 | ||||
| Main bank TD average | AA- | 3.20 | 4.53 | 5.03 | 5.21 | 5.21 | 5.24 | 5.24 |
| difference bps | 78 | 96 | 99 |
Readers will notice that Kiwi Bond rates are actually higher than Australian bank guaranteed rates. (The Australian Government risk-free involves a credit rating of AAA, one notch higher than New Zealand.)
Part of this shift is because depositors will essentially get a AA+ credit rating on their New Zealand bank deposits. That is a two step upgrade from the main bank ratings at present. But the Government guarantee puts the taxpayers on the hook for any bank failure to the advantage of savers, essentially socialising the risk of any losses. The Government is keen for the costs of that benefit to apply to savers, so they won't stand in the way of banks recouping those costs. In the end it is the saver who benefits from the protection, not the trading bank.
Term deposit rates
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33 Comments
Many will now place 100k TDs in multiple banks, the obvious thing to do. Banks like Heartland and SBS will find it alot easier to get TDs when they are government guaranteed. At the same time, the big 4 will lose their 'safe' advantage. Should the government be giving the guarantee to B rated banks?? Yes, TD rates will drop a little with the guarantee.
One component that will tend to reduce the September 7.3% pa rate will be the petrol price. That has dropped by -12% in the quarter, and is down -7% from a year ago.
Petrol tax increases again at the end for February and again in March. Similarly RUC increases again at the end of the month. Much as to say any reduction seen in CPI this quarter that relates to inflation should be discounted as an outlier due to the tax situation.
RUC probably has a wider societal impact though as diesel powers most transport and agriculture. Inflation went out of control and the poor will pay for it (again.)
While its government owned there is no deposit guarantee in place. They will enter all the scheme and you will see your TD rates drop like all the other banks.
One could argue that a government run / owned bank should be "safer" than the others.
I suspect that the RBNZ could put a Statutory Mgr into Kiwibank if it failed to meet capital adequacy. They can probably even OBR Kiwibank.
Hmmmm. Probably.
The explicit Kiwi Post guarantee now long gone But with it back to a 100% govt owned entity, it would be a lot cleaner and easier to bail out.
Possibly by just printing a bit more money. That is the moral hazard of going down the money printing route. Another example would be if there is another big EQ. Last time there was no money printing. Next time you can bet your bottom dollar there would be.
I can see it as entirely possible that after this housing correction reaches completion, term deposits will find even more appeal with those worried about bank failures and (OBR). This will likely be at the expense of brick and mortar. Its risk free peace of mind.
I can see it as entirely possible that after this housing correction reaches completion, term deposits will find even more appeal with those worried about bank failures and (OBR). This will likely be at the expense of brick and mortar. Its risk free peace of mind
TDs are not really "risk free", even with govt guarantees. Very strong probability you'll get your money back for sure, but the risk is more related to its purchasing power.
They are about as risk free as it gets compared to Crypto.
BTC and crypto are different to fiat held in a bank. One has the option to take indvidual responsibility for storage. And people like myself opt for cold storage, which is as safe as it can be because it is essentially self custody.
Normies don't really understand the idea of taking resonsibility for money. They also believe that banks look after their money for them, like a custodian. But that is not the case. They are more like unsecured creditors..
As for purchasing power, that's a whole different story as the fiat price of BTC could go to zero. If history is any indicator, the purchasing power of BTC far outstrips fiat for the diamond hands.
Ignoring the moral hazard inherent in deposit insurance for a minute, who is it actually designed to protect?
Say you borrow $20 off your little brother, saying you'll pay him back in a week. Next week rolls around, but you already spent the $20 and don't have any money to pay him back with. This makes him sad, so Mum and Dad step in and give him $20 instead.
So; cui bono? Who benefits? Certainly not Mum and Dad (i.e. the taxpayer), they're down $20. Your brother (the depositor) lent out $20 and got $20 back, so at least he's broken even. You (the bank) started out with dick, spent $20 of someone else's money, and get out of having to pay any of it back.
Are we supposed to feel like little bro is the lucky one here?
Turns out you've been doing it for a while now. "Borrowing" $20 of little brother's money, combining it with about $3.25 of your own, and lending it out to the kids at school to buy their lunch.
Once you get paid back, you give your brother his $20 back you keep the 3% profit ($0.70). Doesn't sound like much, but that's a 22% return before tax on your contribution. You keep doing it for years and years, and then one day you "can't afford" to pay back your brother.
With the BNZ, if you apply for a new TD on line there often is a "special" rate above the quoted rates.
Word of advice: don't just roll over TDs. Have it paid out and start again: check for specials on-line. eg 5.15 for 9 months. Not a huge increase at 0.05%. But why not?
Hmm we're paying for the guarantee scheme with lower deposit rates? Why don’t the banks simply reduce their profit margin? Profit must be astronomical now with the unusual climb in interest rates. Why aren't the banks paying a "windfall tax" on that unprecedented profit? I know it’s heresy to say.
How dares Chaston justify that interest rates are being managed to accustom depositors to adjust to savings guarantees! Until depositors have those guarantees there is no cause for banks to gouge interest from depositors. Chaston is a fervent spinner of low interest rates for debtors. Clearly there is advantage if depositors can be scammed of their real rate of return. Lower deposits provides opportunity for banks to offer lower debt interest rates whilst maintaining the same margins.
There is no risk to taxpayers from any government guaranteed deposits because taxation doesn't finance anything, except in the minds of mainstream economists who don't understand how central banking operates.
How could taxpayers finance the loss of their own savings, the suggestion is illogical.
Perhaps the TD rates should reflect if you actually want that TD insurance or not. Its bad enough paying tax on the interest but if banks are then going to take another huge chunk to pay the insurance, then I would opt out of the insurance. I cannot see the insurance company being bigger than the bank if it all goes wrong anyway, its like home insurance if you get a big enough event then they go under anyway.
I've noticed that if you ring the bank, especially with new money, they are will to give you the extra 0.05% discretion ok increase again. Always get the principal paid out and shop around.
Spread out the money over 4 banks at least. With a decent On Call going too, kiwibank (3.35%) or heartland.
The majority of bank deposits are created by the banks themselves through their lending and so they are backed by nothing more than the borrowers ability to repay the loan. You can draw your own conclusions from that. If the borrower defaults then the deposit goes with it, its all double entry book keeping.
Currently, all OECD countries have deposit insurance except Israel and New Zealand. Globally, there are 92 jurisdictions having deposit insurance schemes in place, according to International Deposit Insurance Association.
100K gurantee is not ideal for someone who has sold a house but something if spread over 4 banks. Still leaves 600K to be protected.
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