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Opinion: Will the next Trans-Tasman exodus be term deposit savings?
December 8th, 2009
By Bernard Hickey
New Zealanders talk and worry a lot about the exodus of our best and brightest people across the Tasman, but the next exodus may be of term deposit savings chasing higher interest rates in Australia.
The authorities were worried enough about a potential exodus to Australia in the those dark days in October last year that Finance Minister Michael Cullen slapped a deposit guarantee on New Zealand’s savings to match the one put on Australia’s savings. Yet there has been hardly any talk about how New Zealand’s term deposit rates are significantly lower than Australian rates now because the Reserve Bank of Australia has put up its cash rate to 3.75%, while New Zealand’s Official Cash Rate is on hold at 2.5%.
This has been reflected in a widening and historically rare gap between Australian bank deposit rates and New Zealand bank deposit rates, as shown in the graphic above. We follow rates across the Tasman at our sister site interestratenews.com.au and there’s now a significant gap opening up, particularly once ’specials’ are taken into account.
The best rates on offer by ANZ, NAB, CBA and Westpac (the parents of our big four) are around 5% to 5.5% for 3 to 6 months (the six month average in the graphic is distorted by not including the specials.) Here in New Zealand the same banks are offering around 3.5% to 4.5%. The gap is wide for the longer terms too. The best two year rates from the big four here are around 5.3%, while in Australia the prevailing two year deposit rate is around 6%. There are even some special rates on offer at the moment in Australia of 6% for 7 months from CBA and 6% for 8 months from NAB.
The deposit rate wars in Australia appear to be almost as intense as in New Zealand, but rates there are given an added boost of a higher Official Cash Rate of 3.75% in Australia versus our 2.5%. This is an unusual state of affairs. For most of the last 5 years New Zealand’s OCR has been around 100 to 150 basis points above the Australian rate. That’s a 300 basis point turnaround in the space of a year.
The major difference is in the economic outlooks for both economies. New Zealand was in recession for longer and our recession was much deeper than in Australia. Our outlook is also more fragile because our economy has become more reliant on consumer spending and the housing market than our soft commodity exports, whereas Australia has benefited from demand for its hard commodity exports from China.
Australia’s employment and housing markets are also more robust than ours. Our unemployment rate is expected to be above their rate by later this year.
Yet there’s something more to it than that.
Our Reserve Bank Governor Alan Bollard is widely seen as more dovish than Reserve Bank of Australia Governor Glenn Stevens, who started raising rates before anyone else in the developed world and has been consistently more hawkish over the last 6 months.
So is this potential for a shift of savings across the Tasman real?
Many New Zealanders who have worked in Australia retain bank accounts there. Setting one up is much easier than any other country in the world. Australia has a stronger credit rating than New Zealand and the banks involved are very familiar to New Zealanders. After all, most already have accounts with their New Zealand subsidiaries.
Also, there’s the prospect of an exchange rate gain. The New Zealand dollar has weakened versus the Australian dollar from 83 Australian cents in early October just before the RBA started hiking to 78 cents early this week.
For many the exchange rate risk will be too much risk to consider shifting cash, but the incentive of higher interest rates for significantly longer and the chance of an exchange rate gain will be tempting.
After all, the current trend of a widening gap may continue for some time, given RBNZ Governor Alan Bollard is expected to keep the OCR on hold on Thursday at 2.5% and keep it there until mid 2010. The key will be his comments about when the Reserve Bank here can start raising the official cash rate.
Here’s what he said at the last OCR decision on October 29:
The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support to the economy. We think such support remains appropriate. Further ahead, removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do
In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010
In contrast, here’s what Glenn Stevens said last week when increasing the cash rate there by 25 basis points to 3.75%:
In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery. The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand. Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.
With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.
If the current trends continue and Bollard refuses to hike the OCR before the middle of 2010, we could easily see Australian term deposit rates around 7% while ours are stuck around 5%.
The trickle has started
Is it any surprise then that deposit growth at New Zealand’s banks has dropped sharply in the last 6 months? There is already some evidence that New Zealanders are moving a trickle of cash across the Tasman. The record low Official Cash Rate at 2.5% and the recovery of the housing market is already tempting New Zealanders to drop their local savings habit developed over the last 18 months. It may become a Trans-Tasman savings habit.
New Zealanders saved twice as much in foreign currency accounts in October than in local bank accounts, Reserve Bank figures show.
Local term deposit growth in annual terms slumped from 15% in November last year to 4.2% in October, while growth in foreign currency deposits by New Zealanders has turned around sharply in the last couple of months. There was almost NZ$90 million added in foreign currency deposits in November, while just NZ$49 million were added in New Zealand term deposit accounts over the month. The Reserve Bank doesn’t give a break down (that I’ve seen) between Australian dollar and other foreign currency accounts.
The New Zealand dollar was steady on a Trade Weighted Index basis over October and fell from 82 Australian cents to 80 Australian cents over October, but that doesn’t account for much of the growth in New Zealand dollar terms.
It’s too early to call the movement a flood, but it’s something to watch. The New Zealand and Australian economies are already tightly interwoven and our Reserve Bank has to monitor the Australian economy closely.
Now Alan Bollard may want to keep a wary eye on this movement of funds across to Australia. Just imagine what it might have been with a single currency, although we would also have seen a single OCR. It’s something savers might have preferred right now.
Tags: Alan Bollard, Exchange Rates, Glenn Stevens, OCR, RBA, RBNZ
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December 8th, 2009 at 8:11 am
I thought the Aussie banks raised most of their money in Australia? So they borrow in Australia at higher rates to lend to NZ at lower. Personally my family and I have all our deposits in Australia, as do many of my friends its not coming back until I think the risk of a currency crisis striking these shores passes,and rates reflect the risk.
December 8th, 2009 at 9:08 am
Good article Bernard. Unfortunately with the AUD where it is at the moment, its hard to see that there will be much more gain from currency movements. Probably the best time to have done this would have been about a year ago when the NZD:AUD was near 0.90. But back then, the differential was the other way round and it would have cost money to do this. There would also be issues with withholding tax. I wonder what rates the Oz banks offer for NZ based AUD deposits?
December 8th, 2009 at 9:33 am
The flow across the Tas will not drop the aussie rates because it is too small but it sure as heck will push rates up here. Mortgage rates here will rise.
December 8th, 2009 at 9:41 am
I think that actually is a good thing. Higher rates in Oz attracts NZ dollar deposits…OZ goes up , NZ goes down….good for our exports to OZ…and everybody with half a brain knows we need that.
Higher currency outflows mean higher deposit rates in NZ for local deposits need …means higher borrowing cost (esp for consumption) and higher returns for savers…means more incentives to save…and everybody with half a brain knows we need that too….
Best of all scenario ??? Maybe the Kiwi Dollar also as fodder for “carry trade ” ??
Ha Ha Ha
December 8th, 2009 at 9:53 am
i’ve had a reasonable amount in CBA in Brisbane in what’s called Netsaver, so it’s all online.
currently, i get 4.25% ON CALL which is exceptional but this has been a 6 month promo which expires on Dec 31.
the cross rate is an issue but i moved a lot over when it was up a bit more than now.
the tax situation is that they tax me as a non-resident so it’s nominal and very low and then i recall that i get a credit for that from IRD and am taxed as a kiwi.
having an account is very simple to set up and makes a lot of sense esp. when the kiwi dollar starts to tank…you’ll make a profit on the cross rate if you repatriate your money.
December 8th, 2009 at 10:07 am
2% interest rate differential is about .0150 pips. At current spot of .7800 that gives a annual B/E of .7950 to be interest rate neutral. Long term average is .8300 with an extreme high in the last 2 years of .9100. ( do your sums to see if you could affaord that kind of exchange rate loss!) Significant historical risk?
Now I don’t know where the rate is going, but I would suggest that caution is the name of the game. Looks like the same rush into finance company “higher rates” to me, and we know what hapened there!
Be careful what you get invloved in if you know little about it.
Beware a crashing AUD if the equity markets reverse, just like the last peak at .9100.
December 8th, 2009 at 10:47 am
Thanks Nicholas, you have answered my question, which was what happens when China stumbles. How long can they keep building factories and houses no one needs?
To my mind the RBA has a spendthrift administration to cope with and appears (amazingly to me) to see no harm in stoking the house price and debt bubble over there. There will be tears methinks. Steve Keen is my (Aussie) hero.
December 8th, 2009 at 11:02 am
Lets’ put the shoe on the other foot.
What do the Aussies see?
“Look! I can borrow at X% less than here, in Kiwiland, and pay 78 cents in the dollar to buy ( take your pick; but I know what they see as ‘good value”!). Then, if the rate goes back to long term average or above I make on the exchange rate as well”
Let me think? Do the Aussie have more borrowing power through their New Zealand offshoots, or do New Zealanders have more lending power into a ‘foreign’ bank?
Who knows…..
December 8th, 2009 at 11:12 am
I put some money in Aussie when it was up around .92
I don’t think it hurts NZders to have an account there. Also a good place for the aussie dividends to get paid to.
If you shop around (and use PIE’s) you can get similar rates to Aussie here though.
Long term average is around .85 so at today’s cross rate it would be too risky to change more kiwi into aussie.
December 8th, 2009 at 12:12 pm
OCR’s of each country have massive impact on the exchange rates of the two countries.
Yea it was around .92 when NZ had its OCR significantly higher than aussie. Now as this trend reverses we are seeing the same thing on the other side of the 0.83 long term average.
International markets have priced the kiwi very high grouping it with the AUD as a commodity currency and expecting NZ OCR to rise.
As this does not happen (not going anywhere this thursday anyway), expect to see NZD weakening more and more.
As we speak NZD is buying 0.7786 AUD, or looking at it from someone whos got $ in aussy already, 1.2843 NZD for every AUD invested, about 16% gain through currency alone if you brought at the right time
December 8th, 2009 at 12:46 pm
Can Bernard, or anyone out there explain in simple steps how a New Zealander in NZ goes about opening an Australian Bank account? I have some funds in Australian Dollars with an NZ bank and I find that whenever I need to repatriate some funds the exchange rate used by the NZ bank in calculating how much to give me is different from the daily rate advertised on the news – and is not favourable to me but rather enables the bank to make a killing on the transaction. Also, the interest rate on these funds is way low. It does not make sense.
December 8th, 2009 at 1:32 pm
fatima
you contact your bank and tell them you want to open an a/c in OZ. and request they email you the paperwork.
you fill all this in, print it out and take it to your bank along with copies of your passport as ID.
depending on your bank you need to open an everyday a/c inOZ.
in my case, with ASB it’s called a Streamline a/c.
you use this as your fund entry point and then you go online and shift it into your ‘Net a/c which for me is Netsaver.
there’s abit of stuffing around by the banks and they’ll phone you with queries etc but it’s all pretty seamless.
the rates are better and my pick is the Kiwi will depreciate against the Oz dollar so it’s all a no-brainer.
hope that helps
December 8th, 2009 at 4:10 pm
I’m not up-to-date on retail banking in NZ, but don’t the mainstream banks offer AUD term deposits? This makes perfect sense with the “Big Four” and could be a very profitable revenue stream as the banks clip the ticket on when exchanging NZD to AUD. This is actually common practice among mainstream Japanese banks who offer term deposits in “high-interest” currencies (specifically NZD, AUD, and USD).
December 8th, 2009 at 4:15 pm
You’d think so, wouldn’t you J.C. !
But you should see the look on a branch officers face when you ask a question like yours. You’d think you’d just landed from Mars!
I’ve told the story here, previously, that it took me months to get a simple Forward FX facility, just because I didn’t have a trade backed commitment, and ‘I might be speculating”. Needless to say the opportunity had somewhat gone.
December 8th, 2009 at 4:38 pm
i’m in aus. Hope to return home one day. Half my money in NZ, half in Aus. Not sure whether to cheer for the kiwi or aussie dollar. Just wish i could get half decent return on NZ money. 3% is pathetic.
December 8th, 2009 at 4:58 pm
So this is confirmation then that we are being done over with lower term deposit rates and higher mortgage rates. We must be creme de la creme for the Aussie banks.
December 8th, 2009 at 5:00 pm
This exodus story does not quiet make sense. Over last 2-10 years we had highest interest(saving) rates in the world. And yet, we’ve seen real Kiwi exodus to Aussie.
December 8th, 2009 at 5:45 pm
It will only make sense to move very large amounts, say in millions, because one will be taking both interest rate and exchange risks when investing overseas in other currencies. Also the terms of investment should allow quick repatriation to take advantage of exchange rate movements and will need regular monitoring. Could be very stressful for average investors. Remember these average investors wanted to invest in trouble-free real estate deals with Blue Chip where they did not have to do any managing but were expected to receive rent and capital appreciation while relaxing on the beach.
Not our cup of tea, I suppose to take a punt in other currencies.
December 8th, 2009 at 5:49 pm
ASB has an arrangement with the parent CBA. They could arrange for NZ residents to open a/cs with CBA in Australia by getting a confirmation of interest/intention over phone. But one has to go to Aussie to activate that a/c, after producing identifation, etc.
December 8th, 2009 at 7:37 pm
If the banks need more deposits here, they will be forced to raise deposit rates, supply and demand will take care of that.
It doesn’t take intervention from the RBNZ to raise rates to take care of this potential problem.
December 8th, 2009 at 8:50 pm
Finance company failures have helped the banks a lot, because mum and dads have been depositing their money in NZ banks, for very low interest rates. The banks have then been lending it to people to buy overpriced houses and making a good couple of % from the deal.
December 8th, 2009 at 9:10 pm
‘The authorities were worried enough about a potential exodus to Australia in the those dark days in October last year that Finance Minister Michael Cullen slapped a deposit guarantee on New Zealand’s savings to match the one put on Australia’s savings.’
NO, this is a MYTH!
This was NOT an issue raised in Treasury & RBNZ advice prior to the crown retail deposit guarantee scheme being introduced.
“We recommend that you: a) note that it is our view, as of today [Friday 10th Oct 2008], that it is not necessary or appropriate to take any further policy measures, in response to the international financial crisis” (from http://www.treasury.govt.nz/publications/informationreleases/guarantee/pdfs/t2008-2000.pdf)
The advice listed signs that indicated that a guarantee of financial institution liabilities should be considered. None of these signs happened, but Dr Cullen introduced the scheme on Sunday 12th Oct 2008.
See here for more details:
http://davidhillary.blogspot.com/2009/11/more-evidence-nz-big-banks-had-ample.html
Bernard, please stop repeating myths. Are you listening, or you will repeat again next time you want to make a sensation of something?
December 8th, 2009 at 9:13 pm
if you spend time in oz you have to have an account there or get ripped every time you use your credit card,any advice to switch your money into AUD term deposits would only be good for the smart money that done it at least 3 months ago and want the suckers to shove a billion over there and get the cross rate down so they can switch back.
December 8th, 2009 at 9:17 pm
“We are not recommending implementation of such a scheme yet. Market conditions at this point do not warrant such an initiative. It would also imply a material departure from the established New Zealand approach to financial supervision and regulation. Offering the guarantee would enduringly change expectations about government responses to financial stress and institutional failures in the future. Offering a guarantee of this sort would involve assuming large unquantified contingent fiscal liability”
If was good advice from officials. Dr Cullen ignored it.
December 8th, 2009 at 10:22 pm
David, personally I was thinking about moving all my money out of NZ banks, before the deposit guarantee was introduced, and moving my money into Australian accounts. I know a lot of other people who were too. Even now, I know of some who are reluctant to lock in their deposits into term deposits that extend after the guarantee ends, as no one knows what is going to happen. It is all about perception of zero risk, which a bank is currently a zero risk place to keep your money, however it is not an investment. Remember, if everyone who has deposits in banks withdrew their cash tomorrow, the banks simply couldn’t pay them out.
December 8th, 2009 at 11:24 pm
Rob, actually the NZ large banks had no trouble with funding, it was the smaller and more risky institutions that were having trouble. It is called a flight to quality.
December 9th, 2009 at 9:32 am
Whatever David.
I am with Rob. Prior to the GG I was also close to moving everything to Aussie.
Cullen saved me the bother.
Also giving the GG to finance companies (as bad as that is) has been an opportunity. I am getting 8% with interest paid monthly from SCF. Will take my money back on maturity before the GG ends. Thanks Dr Cullen (you twerp).