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Interest rate changes are now fast-moving and volatile, at both the wholesale and retail levels. We update what that means for term deposit investors

Interest rate changes are now fast-moving and volatile, at both the wholesale and retail levels. We update what that means for term deposit investors

Sudden risk-off conditions and diving official benchmark interest rates have seen wholesale money markets in turmoil.

Poor liquidity availability has corporates, governments and banks all scrambling to shore up their balance sheets for inevitable stress.

One lesson well-learned in the 2008-2012 GFC was that wholesale funding is a fair-weather friend.

You might think that conservative and loyal investors would be highly valued by institutions and that they would work hard to ensure holding term deposits was an attractive option.

They are. BNZ raising its 18 month offer to 2.65% is one example. And despite all this turmoil, it is a credit to New Zealand banks generally that TD rates haven't fallen quicker recently.

But banks are also facing diving loan demand.

This tension between the need to keep depositors from withdrawing and yet not needing a flood of new money puts retail investors on the back foot - especially as there is little real competition by banks for their loyalty and no depositor has any real power. There are squillions of investors and only ten retail banks, but only five are market significant. There is a negotiating imbalance that works against customers at this time.

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The best you can do is keep an eye out for good deals and go as long as you feel comfortable with, if you have decided to keep funds in TDs. (There is zero point keeping any funds in savings accounts - interest is trending to 0.05% pa in these floating "yesterday" accounts.

The table below suggests that 2.65%-2.80% for eighteen months could be a good deal over that time. Higher rates are on offer for shorter terms but expectations won't be high that they will last.

And when deposit guarantees are instituted (it is Government policy to bring them in, even at a modest level) that will put further downward pressure on TD offer rates. In every other country where deposit guarantees are in place, TD offer rates are very much lower than in New Zealand. There is no reason to expect that to be different here when the promised guarantee is in place. And depending on the stresses the banking system may face, the guarantee system could be rolled out quickly here - recall it was an 'overnight' decision the last time it was used.

The updated rates in the table below are the highest offered by each institution for the terms listed. You will, however, need to check how often interest is credited or paid. That important factor is not filtered in the table and rates with various interest payment/credit arrangements are mixed here. However, our full tables do disclose the offer basis. (The codes are explained here).

Our unique term deposit calculator can help quantify what each offer will net you.

All carded, or advertised, term deposit rates for all financial institutions for terms of less than one year are here, and for terms of one-to-five years are here.

Term PIE rates are here.

The latest headline rate offers are in this table and marking the changes this week.

for a $25,000 deposit Rating 3/4 mths 5 / 6 / 7
8 - 11
  1 yr   18mths 2 yrs 3 yrs
Main banks                
ANZ AA- 2.00 2.40 2.40 2.35 2.35 2.35 2.35
ASB AA- 2.00 2.50 2.65 2.50 2.40 2.40 2.40
AA- 2.00 2.45 2.55 2.40 2.65 2.40 2.40
Kiwibank A 2.00 2.70 2.50 2.50   2.40 2.40
Westpac AA- 2.15 2.50 2.65 2.50 2.70 2.50 2.50
Other banks                
Co-operative Bank BBB 2.05 2.50 2.60 2.70 2.50 2.50 2.50
Heartland Bank BBB 2.25 2.80 2.80 2.75 2.70 2.70 2.70
HSBC Premier AA- 1.70 1.90 1.85 1.85   1.85 1.85
ICBC A 2.45 2.80 2.80 2.80 2.80 2.80 2.80
Rabobank A 2.05 2.70 2.65 2.55 2.50 2.50 2.50
RaboDirect BBB 2.25 2.65 2.65 2.50 2.50 2.50 2.50
A- 2.25 2.60 2.65 2.60 2.60 2.60 2.60

Term deposit rates

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most retail depositors now are less concerned about yield now but more on security and hope to avoid a crash course on the risk/reward spectrum.

Looking for return 'of' investment rather than return 'on' investment.

"There is zero point keeping any funds in savings accounts"
I don't think it is quite "zero point".
Term deposits are locked in and difficult to access; what is it - 30 days before they can be accessed and then severe penalties? Given this turbulent and uncertain times, it makes sense to have readily accessible money.
And so what, if saving accounts return next to nothing interest - even TD 2.4% less tax is pretty close to next to nothing on 12 month terms.
As part of battening down the hatches, four weeks ago (as posted) I transferred my KiwiSaver Balanced account to straight cash fund albeit for a pittance of a return. Will look to the upturn for more exposure to equities again.
Have had some sums of money come in for contract work which I have left in my savings account in the interim - will see what happens in next few months or so before deciding.
Worth noting 1918 flu epidemic peak-periods of deaths passed within each of the major centres within a month (Geoffrey Price, "Black Flu", University of Canterbury Press, 2017)

I switched to conservative late last year, account is now down around 5%, hate to think what I'd be looking at had I left it in growth. Think I'll switch to aggressive once the first round of defaults and bankruptcies rolls through the US.

My KiwiSaver is in a Cash fund. It’s been there since RP mentioned it a year or so back. I need to move it out into a Growth fund. With no equity exposure at all, I’ll try for maximum share exposure. Then I have to sort out the TDs. Going short dated with a view of moving to equities.

The penalty is not severe its based on the interest rate you would have got for the shorter term. The closer you are to the end of the term the less you loose. Nothing wrong with the rates either after all its all relative to what you have invested. Your deposit is the last thing to get hit by that stage the whole country is bankrupt.

Can someone please tell me if the OBR only applies to term deposits or is money in a straight savings account up for grabs also in a time of turmoil?
Thanks in advance

Any bank deposit, whether it's a term deposit or on call, is up for grabs.

What about your credit card account?

Why would you keep a debit balance on your credit card?

In any event, banks retain the right to close your credit card and demand payment for the balance owing in full at any time. Same as they retain the right to call in a mortgage and demand payment in full at any time. Of course they don't typically use these powers, but they have them.

Good luck to them calling back the money on mortgages that they have lent to NZers to buy houses.

My question was about whether a credit card balance could be part of a 'haircut'. Under normal circumstances you absolutely wouldn't have a positive balance on your credit card, however if by some quirk (due to the assumption that credit cards are always in negative balance) they were exempt from a haircut, flicking your TD's and savings into your credit card if there is a run on the banks might suddenly seem like a good option. Crazier things have happened.

It sure is right after unemployment hits 25% and then your house devalues over 50% they start looking for spare cash by calling in your mortgage and if that doesnt fix it your bank account gets a haircut just as the country gets declared bankrupt.

Most of ASEAN countries banks, still offering around 5%, with it's respective govt. guarantee - if you unsure for their National/local banks then contact the foreign bank which also operates there, such as ANZ & US banks.

At the moment would it be better strategically to have cash on hand or use some of that cash to reduce mortgage debt even if you were positively geared? Obviously one would need a cash fund but how much? Enough to see you through, 6 months, 1 year, 3 years, 5 years? I'm thinking perhaps enough cash to cover 5 years of impoverished living.

What happens to the value of leveraged assets (say property) if people no longer want to hold debt?

Regarding property such as a decent basic rental I would say the value would be set by what it returns. It should return about 1.5% more than a term deposit. So a 650k house that earned $500 a week is 4% while 650k in a TD at 2.5% returns $340 a week implying that the property's value is about right. Very rough sort of calculation I know. If people cannot afford that sort of rent then the property value will likely go down unless interest rates reduce further keeping that 1.5% differential.

That assumes a liquid credit market however. If credit freezes up and mortgages start getting called in, all the yield in the world may not find you a buyer (unless someone stumbles out of the foothills with a bag full of $100 notes and gold coins).

As there credit squeeze comes on banks are going to be less likely to want to lend. If you've already got the mortgage then I'd hold the cash. If you get called you can pay it back but if you don't you can pick up some bargains.

My grand plan of putting the last few maturing TDs into (more) treasuries and bonds, via funds, given the low TD rates offered, and we didn't want our money tied up for too long, got a very bloodied nose last week with the spike in yields. But Friday they rallied, and if RBNZ starts QE next week, there might still be a decent rally.

Very dangerous environment however, with ultra-low interest rates set in for years so long as RBNZ can keep control of it: I reckon one of the worst investment markets to be retired (or near to) in.

I've had this conversation for a while with people approaching retirement. Generally they own property and don't understand the relationship between interest rates and asset prices. They're happy the own an expensive house, but disappointed that their savings account is earning a near zero return in real terms. I tell them you can't have your cake and eat it....but it seems to fall on deaf ears.

Yeah, well, that 'expensive house is about to fall between 20% and 50% over the coming two years. No asset class escapes this. And even if that weren't so, you can't eat your house.

They best be hoping the guarantee they gave on their kids loan doesn't get called in...

Hell yes, Panther. That's a big issue: I tell parents be very wary of doing that, but banks will take every security they can get their hands on, and there's often an element of emotional blackmail. Over 30 years I've seen that go badly only twice, but it's tragic, and mom and dad don't have time to recover. Children shouldn't put their parents in that position.

At that point the house of cards starts falling.

As part of the Covid-19 rescue package, the government should exempt the first $5000 in Bank interest from tax. That would benefit heaps of savers. Will Grant Robertson oblige in the budget ?

Already suggested this weeks ago. The lower TD rates could be quickly offset by not having to pay tax on the interest. It would be an instant 33% gain for most people and a minimum of around 17.5% for many. That said I'm not seeing big shifts in TD rates, looks to have bottomed out to me. Banks will be trying to keep the TD investors right now, the last thing they want are large withdrawals and transfers. The banks are going to be the first to go into full credit lockdown.

Funny - we've been unwilling to do this previously to help FHB's save a deposit for their first home...but now...the rules change...but yes ok that would be great.

I took my money out of term deposits a year ago and put it in gold. For the reasons of the poor returns, and i didnt want my money used for the property market. have made 35% on it in the year...5% of thats probably been helped by the falling NZD. I think in the coming months i will feel even more comfortable with my decision...but who knows.

Assume it is gold bond/securites and not physical gold. How liquid are they ?

There is only physical gold...paper gold is....paper.

There is only physical gold...paper gold is....paper.

Not all paper gold is...paper. PMGOLD (Perth Mint) is fully redeemable and backed 1:1.

Each to their own. There is a separation happening at the moment between physical gold and silver, and what can be termed paper, that is quite interesting.

Omg - reading these articles the suggestion is that deposits take a haircut to sort out the debt crisis. I thought humans adhered to the Darwinian process.

I thought banks said they were safe as and didn't need the RBNZ medicine only a few months ago. My bad.

What are you saying smalltown it cannot happen? Well it has happened in some countries in the past but it would appear its a last resort after all other measures have been taken and the country is basically bankrupt.

We all know David is anti TD insurance and his stance is boringly old hat. The USA (since 1933) and other more sophisticated markets have had it for years covering much higher sums than NZ is belatedly considering.
The return on TDs has way more to do with the particular OCR than anything else.
So David, based on your lack of support for deposit insurance and the fact that NZ does not have it and will not be introducing it to cover any significant would be a great time to make a run on the bank...because there is nothing to protect your deposits once people stop paying their mortgages and car loans in a few weeks and the banks start to get stressed, and do you think the Aussie parents of all 4 majors will come running to the rescue of NZ depositors???? I sincerely hope I am wrong.

Higher term deposit rates are a reflection of higher risk. Always remember to read your terms and conditions carefully because you will discover (if you didn't already know), your status is "lender", and you are an unsecured creditor. If your bank needs to apply the OBR to survive, a term deposit will be used in a bail-in.
Lender beware.

Days to the General Election: 29
See Party Policies here. Party Lists here.