David Chaston reviews where savers now stand following the recent OCR cut and the prospects for more of them

David Chaston reviews where savers now stand following the recent OCR cut and the prospects for more of them

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.

Term PIE rates 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%
ASB 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%
Westpac 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%  
Heartland Bank 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%
RaboDirect 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%

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The recent cut to the Official Cash Rate has reinforced the view that 'financial repression' is closer in New Zealand now.

Let's hope the RBNZ is more successful than the failed social engineering undertaken by Sweden's Riksbank.

Quantitative easing is supposed to drive down longer-dated yields. But as investors obsess over market depth, the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher. Read more and more

From ANZ in my mail box.
The May trade balance of $350m was stronger than the median market expectations of a $100m deficit. Seasonally adjusted estimates revealed a $35m monthly surplus for May, the first surplus in five months, with the 3-monthly deficit easing to $220m sa. The annual trade deficit narrowed to $2,570m ($2,656m in April) but this compares unfavourably with a $1,320m surplus a year ago, and is expected to resume deteriorating.

Will our foreign wholesale funding friends expect to endure higher repayment risk for lesser rewards as well?

I found this quite amusing

David said
All predictions of what interest rates and inflation may do in the future is little more than guesswork, even by the professionals

I had to laugh when i read (Even more than the profesionals)

I think he is getting a dig at people like me

What about this calculation

Inflation 3% interest rates 6%

$100 saved
Interest payment = $6
less tax at 30%
return $4.20
less inflation of 3%
net return $1.20

Yes, much better of with inflation.
Its good to pay taxes on the inflation part of your return.

$100 saved
Interest payment = $6
less tax @ 30% = $4.20
less inflation of 3%
real return of $2.10

Saving is for fools, Borrowing is for the wise and Profits are for the Banks.

I've been thinking the optimum position to be in these days is to neither save nor borrow but to spend or give away all of your substantial savings wisely, hide a fair amount of cash somewhere, retain a substantial overdraft facility (say to the value of around 2-3 years worth of spending for essentials: power, food, medicines etc.) with one or two banks, and keep a number of credit cards with reasonably high limits.

Exactly the position I am working to be in, 70% there, thanks.

except for the not borrowing it sounds like the governments official plan.

But yes in a capitalist system there is little reason for holding onto money. Money that is static does nothing. Better to lend it to someone who can use it, or spend it on something with return or durability (that doesn't have ownership/transaction overheads).. the "hide" is into investments or valuable durables, which at the moment in NZ is houses.
One should keep personal spending down, but due to the fringe benefit tax we don't have tax evasion options available that is in many of the US and UK self help books. that's why many liable parents under Child Support actual do moderately well 10 years after the stop losing money - they have to learn to live on the cheap, but get lifestyle through friends and work that has in built benefits, no point getting short term returns as the CS&IRD will take it, but perfect time to invest into long term 10 - 20 year plans (especially non-monetary ones like education or career building).

Saving is for the ignorant. Not buying shares or property is the domain of fools.

world govt. debt much worse than stated by debt to GDP. read this.
The only thing that worries me about borrowing is that you might not have as much debt as someone else but can we pay it back. If we are all borrowing to speculate as you do when money is cheap, asset values are not very real. Is the way the world finacial system being run sustainable? You only have to look at an extreme case like the Chinese stock market to see what could happen to asset bubbles. When we get to the bottom of where interest rates can go how can we save a bubble from popping next time. If you think there is no risk buying property and shares I wouldn't be so sure.

So said the shoe shine boy just before the Wall Street Crash. Oops!

4% interest for saving accounts is still better than many of the Auckland properties rent yields :)

..and money is available when you need it. But try to sell a house cashing out your "investment" as soon as the prices start falling and "investors" and people start delaying their purchases..

Allowing cheap credit without regulations to ensure money gets into the productive economy and does not get "stuck" in financial speculative markets can have a very negative impact in medium-long term (bubbles, burst, unemployment, instability, lack of confidence).

The velocity of money is worsening globally. Whoever expecting inflation can sit tight..

Good points, and 4% is significantly more than most dairy and primary agriculture operations are making (for the business, when wages included) which tells you just -why- 99% of NZ is in deep trouble if the government policies (eg Treasury) keep acting as though we are as rich as their government funded paychecks make them.

This is why we are going to be a basket case long term. We cannot just rely on Chinese purchases of farms and houses to get a better standard of living.
A friend of mine in Auckland went to a property investment seminar recently. He was told that a dairy farmer would be far better off financially if he were to sell his farm and put all his money into Auckland's rental housing market, He would get about 17% tax free capital gain and another 4% yield on the rent and not have to work for it like he does now.
If that is the case, then we are in dire straights.
The National Government's economic policies will send us down a path of genuine wealth destruction long term if this is the case.

itsme - hardly this Govt's policy - actually read your earlier excellent post which I agree with. This Govt is struggling to keep growth and employment going but is struggling with the consequences of the policies of other Govts who have handled their situtation, be it majorly bigger, short sightedly and poorly.

you can get better yields in property shares or company issued bonds, same as above can sell quickly if you need the money.

Is this a case of fiat being found out? Fiat is merely a claim on real wealth and depends entirely on agreed behaviour.
Next time the circus is town, and they take your money in exchange for their own coupons, think about how much value these tickets have the day after the circus leaves town. Who will accept them?
Now imagine that these tickets have time limits on them; we are just at this stage. So ignore the clowns (economists/politicians/talk-back hacks) and get your tickets exchanged into some candy-floss and cuddly bears. PS there are far more claims on the teddy bears than even exist, by a factor of many times over cue derivatives, pensions, etc etc

in the long run we are all dead offcut2

It's all part of the plan ("working" for families was the lead instrument - National was a bit slow to take it up but now they're on board with gusto); impoverished populace, dependent on government= Pollies and monopolies dreams come true!

Sadly, when the Global Financial Crisis occurred, many countries would not bite the bullet and took the easy option of flooding the world with cheap money. This was supposed to go into productive enterprises creating jobs. Instead, most of it went into assets, such as real estate. What was done has never been successful anywhere in the world before, it is only a temporary measure to cure the problem.
Market forces should have been allowed to take effect, even though it was a bitter pill to take.
Now we are heading back towards recession and deflation as a result.
Savers, ( mostly retired fixed income people ) are subsidising property investors and speculators with negative interest rates. Governments are trying to stop people saving to fix the problems. It is not working and all that is happening is that we are putting off the day of reckoning.

"This was supposed to go into productive enterprises creating jobs. Instead, most of it went into assets, such as real estate. What was done has never been successful anywhere in the world before, it is only a temporary measure to cure the problem."

No it wasn't, the bailouts, QE, and stimulus were transparent efforts by the elites to preserve their investment positions, while the costs were loaded onto the wider public and future generations. In fact as you say the wealthy elites who generate most of their wealth from capital gains, have done wonderfully under the new global financial regime, but this is no accident. It is part of the plan all along. The banks didn't even need to write down the debts owed by homeowners who were in negative equity, even after Hank Paulson bowed under public pressure, offered a deal to Obama, who's administration were in transition after their victory in the 2008 Presidential elections.

"The mortgage crisis was worsened this past time because critical decisions were made during the transition between Bush and Obama. We voted the TARP out. The TARP was basically being administered by Hank Paulson as the last man home in a lame duck, and I was disappointed. I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it. This is now December, so we tried to get the Obama people to ask him and they wouldn’t do it."

the retired savers used to spend their interest, that spending has now reduced and now we also have a higher proportion of wages servicing mortgages it is now left to the government to borrow and spend to keep the economy going