The US Federal Reserve's rate cut on Thursday morning, New Zealand time, can be seen as a pre-cursor for next week that will see rate reviews in Australia on Tuesday, and then in New Zealand, through the Reserve Bank, on Wednesday (August 7).
In Australia rates were cut only a month ago (to 1%), while in New Zealand the RBNZ cut (to 1.5%) in May. If our Official Cash Rate is cut again next week, (likely to 1.25%) this would put further downward pressure on retail interest rates.
For term deposit rate watchers, the key rate here is 3%.
Here is what most banks offer now:
| for a $25,000 deposit | 6 mths | 1 year |
| Main banks | ||
| ANZ | 3.05 | 3.00 |
 |
3.05 | 3.00 |
 |
3.05 | 3.00 |
| Kiwibank | 3.15 | 3.10 |
 |
3.05 | 3.00 |
| Other banks | ||
| Co-operative Bank | 3.00 | 2.95 |
 |
3.15 | 3.20 |
| HSBC Premier | 2.70 | 2.70 |
| ICBC | 3.10 | 3.15 |
 |
3.10 | 3.20 |
 |
3.10 | 3.00 |
 |
3.00 | 3.00 |
When rates fall next, they are likely to go below 3%.
Until now, banks have resisted passing on all the RBNZ rate cuts to borrowers, holding some for term deposit investors.
But with the OCR now at 1.50% and threatening to go to 1.25% soon, it is hard to see banks passing on zero of such a cut to mortgage borrowers, so that will mean the next RBNZ cut will drag the key TD rates below 3% for the first time.
If they do, that will signal a new record low.
Given that inflation is now 1.7%, and marginal personal income tax rates are 17.5%, 30% and 33% depending on income levels, the after-tax, after-inflation returns (that is, real returns) are now under severe pressure.
| marginal | Interest | |
| tax rate | rate | |
| Before tax return | 3.00% | |
| - return after tax, tier 1 | 17.5% | 2.48% |
| - return after tax, tier 2 | 30.0% | 2.10% |
| - return after tax, tier 3 | 33.0% | 2.01% |
| Before tax return | 3.00% | |
| - return after tax, tier 1, after inflation | 17.5% | 0.78% |
| - return after tax, tier 2, after inflation | 30.0% | 0.40% |
| - return after tax, tier 3, after inflation | 33.0% | 0.31% |
After-tax, after inflation returns may not turn negative even if the RBNZ cuts rates by -25 bps on Wednesday, but it will be academic. The current +31 to +78 bps real returns could dip to +10 to +60 bps depending on your tax bracket, but both are "next to nothing" on this basis.
However, another subsequent cut by the RBNZ will drive these real rates negative.
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