Term deposit rates are rising in New Zealand. How long that trend will continue is anyone's guess.
But as rates become more attractive - even if they are below current inflation rates - two things stand out.
Firstly, we still don't have any official deposit guarantee protection. It is coming, but not due until some time in 2023.
And secondly, New Zealand rates are far more attractive than Australian term deposit rates - where they do have a Government guarantee.
In Australia, combined balances up to AU$250,000 per account holder (NZ$278,000) are guaranteed by the Australian Government.
As regular readers will know, we have noted the moral hazard involved in Government guarantees. The RBNZ used to be worried too, until Governor Orr arrived and accepted the new Labour Government's position to add this type of 'protection' for New Zealand bank account savers.
Savers should be prepared for a sharp fall in interest rate offers. That is because the cost of the 'guarantee' will be passed back to them in the form of lower returns (even if not immediately and directly). State guaranteed returns become risk-free, and so it will be a natural transition for term deposit rates to fall to risk-free levels when they are guaranteed. Risk-free is currently what is offered for Kiwi Bonds. Interestingly, these have risen sharply at the short end today.
Here is a workup of how term deposit rates compare currently between unguaranteed New Zealand, and guaranteed Australia.
| The latest headline rate offers are in this table after the recent increases. | ||||||||
|
for a $25,000 deposit
|
Rating | 3-4 | 5-7 | 8-11 | 1 | 18 | 2 | 3 |
| July 28, 2022 | mths | mths | mths | year | mths | yrs | yrs | |
| % | % | % | % | % | % | % | ||
| New Zealand | no Govt guarantee | |||||||
| ANZ | AA- | 1.90 | 2.95 | 3.30 | 4.00 | 4.05 | 4.10 | 4.20 |
| ASB | AA- | 1.85 | 2.85 | 3.00 | 3.90 | 4.00 | 4.10 | 4.35 |
| BNZ |
AA- | 1.85 | 2.85 | 3.30 | 3.90 | 4.00 | 4.10 | 4.35 |
| Westpac | AA- | 1.80 | 2.75 | 2.95 | 3.65 | 3.80 | 4.10 | 4.30 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average | 1.85 | 2.85 | 3.14 | 3.86 | 3.96 | 4.10 | 4.30 | |
| Australia | A$250,000 Govt guarantee | |||||||
| ANZ | AA- | 0.35 | 0.85 | 1.05 | 1.25 | 1.25 | 1.50 | 1.75 |
| CBA | AA- | 0.35 | 0.80 | 1.05 | 1.20 | 1.25 | 1.45 | 1.70 |
| NAB | AA- | 0.45 | 0.85 | 1.15 | 2.45 | 2.45 | 2.00 | 2.00 |
| Westpac | AA- | 0.40 | 0.80 | 1.10 | 1.10 | 1.10 | 1.50 | 1.75 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average | 0.39 | 0.83 | 1.09 | 1.50 | 1.51 | 1.61 | 1.80 | |
| The NZ advantage | ||||||||
| ANZ/ANZ | 1.55 | 2.10 | 2.25 | 2.75 | 2.80 | 2.60 | 2.45 | |
| ASB/CBA | 1.50 | 2.05 | 1.95 | 2.70 | 2.75 | 2.65 | 2.65 | |
| BNZ/NAB | 1.40 | 2.00 | 2.15 | 1.45 | 1.55 | 2.10 | 2.35 | |
| Westpac/Westpac | 1.40 | 1.95 | 1.85 | 2.55 | 2.70 | 2.60 | 2.55 | |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Average advantage | 1.46 | 2.03 | 2.05 | 2.36 | 2.45 | 2.49 | 2.50 | |
You may also wish to adjust for the difference is official policy rates, which is +1.15% being the difference between the RBNZ's 2.5% OCR and the RBA's current 1.35% Cash Rate Target (although it may go to 1.85% next Tuesday, August 2, 2022 - so the difference will then become just 0.65% and which markets have probably already priced in).
15 Comments
Thanks for that.
It looks like it will cover all deposit takers including building societies and finance companies.
I guess that's going to pretty much flatten the interest rates across the cohort.
Watch out - at actual implementation time, it might happen that the "Guarantee" gets restricted only to deposit takers with a credit rating over a particular threshold (such as S&P's BBB-), or maybe only to newly created deposits after a particular day, or something like that. Yes, there was no mention of it in the original announcement, but you can not trust this Government nor the current muppets at the helm of the RBNZ, so you might want to be a bit cautious before relying on this. Also, you cannot blindly trust the declared expected timing of its implementation - there might be delays to it, and considering the track record of this government, you'd better be pretty cautious about it.
Yet to see if NZ will proceed in rolling out a deposit guarantee scheme 2023 was touted , anyone know if they have finalised a date. 100K is still short of the 250k Ozzies enjoy....US fed aiming progressively for +3% OCR...the Ozzies might get caught dragging their chain .... OZ banks could be much more exposed to RE pressures as some of their lending practices have been subject to recent inquiry... havent they got 'interest only' rollover issues?
As mentioned in the article, there's a bit of a moral hazard involved with deposit insurance. In fact, deposit insurance is a bit of a misleading term, since it implies that the primary benefit is for depositors.
Deposit insurance is more like a government underwrite for bank assets. Banks get away with paying less interest on deposits, are incentivised to play fast and loose with them, and reduce their risk of a bank run since everybody assumes the deposits will be safe with the bank even in the event of a default. Depositors have their deposits guaranteed, but only insofar as the government is able to cover them, and even if they can, it's the tax-paying public who picks up the bill anyway. There's no way the government coffers are flush enough to cover deposits in the even of systemic bank failure. It will be borrowed money, and essentially equivalent to a bailout.
If deposit insurance is introduced, bank capital requirements must be increased as well in order to compensate for this. We all know how much the banks will like that idea. I'm also confused as to how deposit insurance is supposed to reconcile with the existing OBR scheme. It would either have to be replaced, or some weird compromise introduced where everything under $100k is insured, but everything over that amount if guaranteed to be lost.
KiwiBonds already exist. Cut out the middle-man and get a risk-free rate of return without all the moral hazard.
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