BNZ lifts term deposit rates, but interest still lags 4.9 per cent inflation

Friday, 21 January 2022

People with money in the bank are getting negative ‘real’ interest rates.

Bank of New Zealand has become the first big bank to lift term deposit rates in 2022 as inflation expectations rise.

BNZ lifted its nine-month, one-year and 18-month term deposit rates by 0.1 percentage points to 1.8 per cent, 2.3 per cent and 2.35 per cent respectively, taking them modestly ahead of its major rivals.

Banks rely on term deposits for a large chunk of their funding, but real term deposit rates have dropped deep in negative territory, and depositors’ money is losing value with inflation rising to 4.9 per cent, and expected to go higher.

“A relentless stream of price and cost rises from a multitude of domestic and external sources has resulted in us revising up our Consumer Price Index (CPI) inflation forecasts for 2021 to above 6 per cent, the highest in more than 30 years,” Mark Smith ASB senior economist said.

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“After peaking at close to 6.3 per cent in early 2022, annual CPI inflation is then expected to cool but remain above the [Reserve Bank’s] 1 to 3 per cent inflation target until late 2023,” Smith said.

High inflation led some respondents to a survey of inflation-busting tips by freelance economist Tony Alexander to call on people to ditch their bank term deposits in favour of higher-risk investments that can deliver positive real returns.

One of the respondents to Alexander’s survey said: “Those on fixed incomes with money in the bank at less than 1.5 per cent could invest in higher yielding shares and funds”.

But Alexander said it took a lot to get households to take money out of the bank, and put it into riskier investments.

Banks only pay the minimum they must to attract deposits, says Claire Matthews, banking expert from Massey University.

Banks set their term deposit rates at the level they needed to attract depositors in a competitive market, said banking expert Claire Matthews from Massey University's FinEd Centre.

“They take into account out what they can lend money out for, look at their costs, and then set their deposit rates,” she said.

But it was a competitive market driven by supply and demand, including households’ willingness to accept the rates offered.

“If they go our with an interest rate, but aren't getting the level of deposits they want, they will tweak it,” she said.

Banks also have to take into account what their rivals are paying to their depositors.

Real negative interest rates were not common.

“In recent times inflation has been very low,” Matthews said.

“It's normal deposit rates should be above the inflation rates,” she said.

Depositors should be paid a premium for committing to lending their money to banks for a period of time, she said.

The direction of travel for term deposit rates remains up, with banks’ three-year rates at the big banks ranging from 2.75 to 3 per cent.

Smith said: “We see the risk of high inflation being more persistent, potentially threatening the Reserve Bank of New Zealand’s (RBNZ) inflation mandate and prompting a more aggressive path of OCR tightening.

“For now, we expect a measured pace of 25 basis point hikes and a 2 per cent OCR peak in late 2022, but events can change quickly. The RBNZ looks to have an inflation problem that they need to deal with.”