The recent cut to the Official Cash Rate has reinforced the view that 'financial repression' is closer in New Zealand now.
The chart below signals a rapid change.
Financial repression refers to "policies that result in savers earning returns below the rate of inflation" in order to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments".
We have not had that situation in New Zealand recently, even during the Global Financial Crisis. But the lower the OCR goes, the closer it becomes.
Savers are saving. In fact household deposits are growing very fast - about +10% per year.
Lending however is not growing anywhere near as fast, only about half that rate.
The excess of savers funds helps push down the demand for them and the 'price' (interest) financial institutions will pay for them.
This is exacerbated by the availability of cheap foreign money, although this can be overstated because when it's "swapped" back into New Zealand dollars, the swap process raises the interest rates on them to local levels. But the 'local levels' are only the wholesale levels for the very best rated borrowers. This means it's still cheap money by local standards.
Small banks offering better choices
The impact on borrowers is different for each institution. As the table below shows, among the main banks only BNZ is still offering any sort of premium over the others that is worth consideration.
And among the small banks there are better choices, although at the moment RaboDirect has a clearly better rate offer.
Where rates go from here will depend on a number of factors worth keeping an eye on.
Firstly, the US Fed will set the international tone, and the long-term yields of US Treasuries are inching up in expectation of a Fed hike sometime in the next few months.
Across the ditch, pressure is building for a resumption in RBA rate cuts.
And closer to home, local bank economists are talking up more OCR cuts following Reserve Bank Governor Graeme Wheeler's signals.
The lower local rates go, the closer term deposit offer rates get to the inflation rate.
In fact, Governor Wheeler is working to get inflation back to the mid point of the Policy Targets Agreement of 1% to 3%, ie 2%. The sharply lower exchange rate will lift inflation quite quickly - you only have to visit the petrol pump to see the effects starting to happen.
If inflation rises faster than the Governor is planning on and gets to the top of the range, and another OCR rate cut or two happens in the next six months as many bank economists predict, it is not hard to see that many savers may in fact face 'financial repression' - something they avoided during the GFC but may hit them soon.
Or not. All predictions of what interest rates and inflation may do in the future is little more than guesswork, even by the professionals. It is the future after all and the future is always uncertain.
Savers worried about the potential for rates lower than inflation may want to lock in longer rates while they still have a "4" in front of them. Quoted interest rates for savers are all "before taxes" and it is the after tax return they will be targeting. A 4.00% one year rate for a saver on a 17.5% tax rate will return 3.3%. For a taxpayer on a 30% rate rate, it would return just 2.8% after tax and in that time-frame that could come very close to the inflation rate (and certainly less than what Councils are raising property tax rates by, especially in Auckland).
Use our deposit calculator to figure exactly how much benefit each option is worth; you can assess the value of more or less frequent interest payment terms, and the PIE products, comparing two situations side by side.
All carded, or advertised, term deposit rates for all institutions for terms less than one year are here, and for terms one-to-five years are here.
The latest headline rate offers are as follows:
| for a $20,000 deposit | 6 mths | 1 yr | 18 mths | 2 yrs | 3 yrs | 5 yrs |
 |
3.80% | 4.00% | 4.05% | 4.10% | 4.20% | 4.40% |
 |
3.80% | 3.95% | 4.10% | 4.15% | 4.20% | 4.30% |
 |
3.90% | 4.10% | 4.15% | 4.25% | 4.30% | 4.50% |
| Kiwibank | 3.75% | 4.00% | 4.15% | 4.30% | 4.70% | |
 |
3.75% | 4.00% | 4.05% | 4.15% | 4.25% | 4.40% |
| Co-op Bank | 3.95% | 4.00% | 4.20% | 4.30% | 4.40% | |
 |
4.15% | 4.30% | 4.30% | 4.35% | 4.40% | 4.50% |
| HSBC Premier | 3.50% | 3.60% | 4.00% | 4.10% | 4.20% | 4.40% |
 |
4.10% | 4.30% | 4.40% | 4.45% | 4.55% | 4.75% |
| SBS Bank | 4.10% | 4.15% | 4.15% | 4.30% | 4.40% | |
 |
3.75% | 4.00% | 4.10% | 4.20% | 4.50% | 4.70% |
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