Savers who use term deposits are still better off in New Zealand than Australia, but the advantage is slimming for some terms compared to our January 2023 review.
The advantage for key terms remains substantial however, more than enough to account for the exchange rate.
A NZ term deposit (TD) at one of the main NZ banks currently returns about 6.00% pa for six months and 6.10% for one year. At the same banks in Australia these returns are 4.15% and 5.03% pa, respectively.
That means a six month TD here gives 46% more pre-tax interest to its Kiwi saver. A one year TD gives 21% more. This is because NZ banks have pushed their ~6% offers down to the six month term range whereas that hasn't happened in Australia yet. For a one year TD the Aussies are still only offering about 5% pa.
Some of this may be 'explained' by the central bank benchmark rate standards. In NZ it is 5.50%, whereas the equivalent Reserve Bank of Australia official cash rate (OCR) is 4.35%. That's a 115 basis points difference. NZ savers on a six month TD get a 50 basis points premium over the OCR, whereas the equivalent Aussie saver gets a 35 basis points discount. For a one year term, the Kiwi premium is 60 basis points, but the Aussie saver catches up with a 68 basis points premium.
Another reason Aussies have lower rates is their bank accounts are guaranteed by the Australian Government. That is coming in NZ, at a lower level, but still isn't here yet. So the Kiwi advantage is probably explained by the risk premium involved. But that may well slide when we do get our government guarantee, firstly because banks will be charged a fee for the guarantee (and customers will pay), and then risks will reduce for savers so the risk premium will come down.
Yet another reason Aussie savers get less may also have to do with the Federal Bank Levy - and it is probably fair to assume that is being passed on in lower offer rates. (It certainly hasn't inhibited bank profits, even though they paid AU$1.55 billion in 2023 for that special tax.
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. | ||||||||
|
for a $25,000 deposit
|
Rating | 3-4 | 5-7 | 8-11 | 1 | 18 | 2 | 3 |
| November 27, 2023 | mths | mths | mths | year | mths | yrs | yrs | |
| % | % | % | % | % | % | % | ||
| New Zealand | no Govt guarantee | |||||||
| ANZ | AA- | 4.30 | 6.00 | 6.00 | 6.10 | 6.00 | 6.00 | 5.50 |
| ASB | AA- | 4.40 | 6.00 | 6.10 | 6.10 | 6.00 | 6.00 | 6.10 |
| BNZ | AA- | 4.30 | 6.00 | 6.10 | 6.10 | 6.00 | 6.00 | 5.50 |
| Westpac | AA- | 4.30 | 6.00 | 6.00 | 6.10 | 6.10 | 5.90 | 5.50 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average - NZ | 4.33 | 6.00 | 6.05 | 6.10 | 6.03 | 5.98 | 5.65 | |
| Australia | A$250,000 Govt guarantee | |||||||
| ANZ | AA- | 3.60 | 4.10 | 4.25 | 5.05 | 5.05 | 4.00 | 4.00 |
| CBA | AA- | 3.50 | 3.80 | 4.05 | 5.05 | 5.05 | 5.10 | 4.90 |
| NAB | AA- | 3.60 | 4.00 | 4.30 | 5.00 | 5.00 | 4.00 | 4.00 |
| Westpac | AA- | 3.55 | 4.10 | 4.00 | 5.00 | 5.00 | 4.00 | 4.00 |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Main bank average - AU | 3.56 | 4.00 | 4.15 | 5.03 | 5.03 | 4.28 | 4.23 | |
| The NZ advantage | ||||||||
| ANZ-NZ/ANZ-AU | 0.70 | 1.90 | 1.75 | 1.05 | 0.95 | 2.00 | 1.50 | |
| ASB/CBA | 0.90 | 2.20 | 2.05 | 1.05 | 0.95 | 0.90 | 1.20 | |
| BNZ/NAB | 0.70 | 2.00 | 1.80 | 1.10 | 1.00 | 2.00 | 1.50 | |
| WestpacNZ/WestpacAU | 0.75 | 1.90 | 2.00 | 1.10 | 1.10 | 1.90 | 1.50 | |
| ------- | ------- | ------- | ------- | ------- | ------- | ------- | ||
| Average advantage | 0.76 | 2.00 | 1.90 | 1.08 | 1.00 | 1.70 | 1.43 | |
| January 2023 advantage | 1.31 | 2.11 | 2.31 | 1.39 | 1.33 | 1.29 | 1.30 | |
| July 2022 advantage | 1.46 | 2.03 | 2.05 | 2.36 | 2.45 | 2.49 | 2.50 | |
A close reading of this table shows the advantages Kiwi savers have of Aussie savers is generally reducing. With the guarantee in place it will probably reduce further.
Recall, we do have risk-free term deposits available now in the Treasury's Kiwi Bond offers. These are currently priced like this:
| 6 | 12 | 24 | ||||||
| mths | mths | mths | ||||||
| % | % | % | % | % | % | |||
| Kiwi Bonds | AA+ | 5.25 | 5.50 | 5.00 | ||||
| Main bank TD average | AA- | 4.33 | 6.00 | 6.05 | 6.10 | 6.03 | 5.98 | 5.65 |
| difference bps | 75 | 60 | 98 | |||||
| difference in January | 78 | 96 | 99 |
Readers will notice that Kiwi Bond rates are actually higher than Australian bank guaranteed rates. (The Australian Government risk-free involves a credit rating of AAA, one notch higher than New Zealand).
Part of this shift is because depositors will essentially get a AA+ credit rating on their New Zealand government deposits. That is a two step upgrade from the main bank ratings at present. But the Government guarantee puts the taxpayers on the hook for any bank failure to the advantage of savers, essentially socialising the risk of any losses.
Term deposit rates
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8 Comments
Thanks for the insights into the reasons why there is a difference.
Interesting to consider that NZ TD interest rates will drop once the Government Deposit Guarantee is introduced. But hopefully it will not drop by the same degree as in AUS because in AUS the guarantee protects up to 250k, but in NZ it's expected to protect only up to 100k (less than half of the Aus guarantee), plus all the other reasons mentioned in the article, including the slightly inferior credit rating of NZ banks.
The purpose is that you can stash your savings for a "house deposit" into a relatively safe investment and make 5-10% return on it over a year or two, while house prices might drop 10-20% during the same time. Then you come out on top after a year or two. That's example #1
Second hand cars are also dropping in price, so why buy a used car earlier this year when you can make some interest on your cash and buy the used car for less money with more money a bit later? that's example #2.
It all depends on what you are saving for, in some cases the rate of inflation might be irrelevant (such as the cases above)
Great theory, but with the level of immigration, shortage of housing, cost of building, and entering the recovery phase of the economic cycle,we are probably about to see another round of house price increases above the rate if inflation. I'd advise someone without a house to put their money into assets that are more likely to grow with the economy, unless they can buy in the next year or two.
Good suggestion.
By the way, when I talked about a year or two, I have included this year that's just gone. I had my house deposit money sitting in a few TDs this whole year while house prices were coming down and that wasn't a bad decision in retrospect. That's proof that sometimes it's worth keeping your money in TDs even when they are not quite keeping up with inflation.
Well that is a case where keeping up with inflation doesn't apply. Inflation applies to something you purchase that has gone up in price, not everything has gone up and houses were a case in point. If you had a large TD and that's destined only for a house you have made the percentage house fall plus the TD rate.
Guys, you should not forget about the investment horizon: more conservative investments such as TD's are the best for a short-term horizon, especially if you can't afford the volatility typical of more aggressive investments. In this case, protection against inflation is less critical than protection against volatility.
On the other hand, if your investment horizon is above the 12-15 years threshold (some analysts refer to a 10-year threshold, but I personally think that this is too short), shares are very, very difficult to beat.
There might be some exceptions to this rule: in periods of relatively high interest rates, it is probably better to go a bit overweight with bonds and TD's. And when the Dow is booming, it is probably a good idea to consider getting rid of a few shares. But timing the market is an extremely tricky thing to do, better to be left to more sophisticated investors willing to take the risk; so, in general, the investment horizon (and your personal attitude towards risk) should be the main factors to consider when determining your asset allocation strategy.
The most important long-term determinant of your net returns is your overall allocation strategy.
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