Savers suffer falling term deposit rate drift as a number of factors weigh on how banks set these rates

It wasn't that long ago (September 17) that we were reporting that 6% rates had almost disappeared, and savers needed to be fast to get the last of them.

Now it seems that 5% rates are evaporating and they too may need quick action to lock them in.

It is not dire yet, but the trend is clear.

Only BNZ and Kiwibank are still offering 5% or better rates for one year among the main banks; none are offering that for longer terms. Among the challenger banks for one year, better rates are still available from the three Chinese banks (Bank of China, China Construction Bank, and ICBC).

For terms less than one year, BNZ's eight-month 5.15% and Kiwibank's 200 day 5.25% stand out among the main banks, and it is the same Chinese banks besting all-comers for shorter rates.

Update: Kiwibank has announced two term deposit changes. They have raised their six month term deposit offer by +20 bps to 5.45%. This is a limited time offer until Monday, November 25, 2024. And they have cut their one year TD rate by -25 bps to 4.85%, removing another bank that had a 5% TD rate. This isn't a "limited time" change (!)

We are in a situation where some eight month rates are now better than nine month offers.

But in a falling market, it might seem attractive to lock in rates for a bit longer.

Our table below highlights rate offers of 5% or better.

Wholesale rates are all trending lower, especially for short-terms, as you can see here and here.

And of course, financial markets are pricing in a full 50 basis points chop to the Reserve Bank's Official Cash Rate at its November 27 meeting, only 11 business days away now. While it is true that global interest rates are getting reassessed on the prospect of expected and massive Trump instability and his new push to jerk up US federal government debt levels, that action is in longer term rates from these influences. Locally, and over the next year or so, the pressure will come from any OCR reduction(s).

Local rates are falling because loan demand is weak, and most banks don't need the funds. So competitive pressure for retail funding is not strong. There is no real commercial penalty on banks for offering lower-than-necessary rates to savers. (There's also the "Shane Elliot logic" from our largest bank - 'we don't have to so we won't', because savers replicate much more often than they shift.)

And in the background, the Deposit Compensation Scheme (DCS) is getting organised by Treasury and the Reserve Bank. It will be in effect in about eight months (mid-2025). Institutions in that scheme (both banks and non-banks) will have to then pay into the scheme so they can say to their customers they are protected. That fee will undoubtedly be deducted from institution rate offers - the customer will pay.

The Kiwi Bond interest rates in the table below probably indicate where term deposit (TD) rates are headed with the DCS.

Banks don't need the DCS cost issue to come up suddenly in mid-2025 with a noticeable drop in rates at that time. So in all likelihood, offer rates will start slowly being whittled back from now on so that the impact is hardly noticed.

When you invest, always check how interest is compounded. Depending on how much you are committing, compounding more often is materially better. But some banks advertise their "interest at maturity" rates different to their compounding rates, which for some can be set a little lower. Both Kiwibank and Rabobank do this, although most other main banks don't.

Use the calculator at the foot of this article to see the differences.

We should also point out that after-tax returns can be enhanced for some savers with higher tax rates, by the choice of PIE structures. Not all banks offer these, but most of the main banks do. For a nine month bank offer, they can be boosted by about 30 basis points going this way. In some cases that will make up any difference, or more.

Always ask a bank for a better rate. Many bank staff have discretion to offer more than the advertised rate. (And check your bank's app offers as they too are often enhanced to retain you). But in this environment don't get your hopes up for a positive response. Carded rates are likely to now be the 'best rate', except in quite special circumstances.

Use the term deposit calculator here, or the one below the table, to calculator your expected net returns.

The latest headline term deposit rate offers are in this table after the recent changes to start the week. The background colour-code indicates 5%+ rates still available. (Updated with Kiwibank's latest changes.)

for a $25,000 deposit November 11, 2024	Rating	3/4 mths	5 / 6 / 7 mths	8 - 11 mths	1 yr	18mth	2 yrs	3 yrs
Main banks
ANZ	AA-	4.30	5.25	5.00	4.80	4.55	4.45	4.35
	AA-	4.25	5.25	5.05	4.85	4.55	4.35	4.35
	AA-	4.25	5.25	5.15	5.00	4.65	4.35	4.40
	A	4.50	5.45	5.10	4.85		4.50	4.40
	AA-	4.35	5.25	5.10	4.85	4.70	4.50	4.40
Kiwi Bonds. 'risk-free'	AA+		4.50		4.25		3.75
Other banks
Bank of China	A	4.80	5.80	5.45	5.30	4.95	4.75	4.60
China Constr. Bank	A	4.70	5.75	5.40	5.20	4.85	4.65	4.50
Co-operative Bank	BBB	4.20	5.30	5.05	4.90	4.70	4.50	4.40
Heartland Bank	BBB	4.80	5.30	5.00	4.90	4.65	4.50	4.40
ICBC	A	4.85	5.80	5.40	5.20	4.85	4.65	4.45
	A	4.25	5.30	5.05	5.00	4.75	4.50	4.40
	BBB	4.25	5.30	5.05	4.85	4.60	4.50	4.50
	BBB+	4.35	5.25	5.10	4.85	4.70	4.50	4.40