Why Bank Term Deposit Rates Remain Exceptionally Low

Savers hoping for a significant rise in interest rates on term deposits would be justified in feeling a little miffed by the hikes made by the big banks since the Reserve Bank of Australia began raising official rates in May.

With the end of the era of ultra-low rates, banks were quick to pass on their higher funding costs in full to borrowers. No surprise there.

However, in the term deposit market, analysts say it’s a different story, and banks have been far less enthusiastic about passing on the changes they are experiencing at the wholesale level to their customers.

Things have started to improve over the past two weeks, but the banks have certainly taken their time.

Term deposits require you to lock up your money with a bank for a set period of time, and in return the bank pays a fixed amount of interest. These rates reflect market bets on the outlook for official interest rates (those set by the RBA), rather than the current rate situation.

Thus, you would expect term deposit rates to have risen quite sharply since last year as markets bet on aggressive RBA rate hikes. And, to be fair, term deposit rates have gone up. However, analysts say increases for regular savers have been much lower than those seen in wholesale markets, where banks serve big business and sophisticated investors.

Andrew Murray, managing director of Curve Securities, has worked in financial markets since 1987 and says he doesn’t recall seeing such a wide spread between wholesale rates and consumer term deposit rates.

Murray says the big banks are paying interest rates over 4% on one-year wholesale term deposits, while the Big Four’s retail rates are around 3%. While that gap has been narrowing lately, he says a 1 percentage point difference is “pretty crazy.”

“He is exceptionally wide. I think a lot of that reflects this massive flood of money that all banks have received from retail investors into their accounts during the pandemic,” Murray says.