As expectations increase that the official cash rate will soon drop, term depositors are being warned to expect their returns to fall, too. Photo: 123RF
Falling interest rates are cause for celebration for borrowers - but they are less welcome for people with money in the bank.
As expectations increase that the official cash rate will soon drop, term depositors are being warned to expect their returns to fall, too.
According to Reserve Bank data, new term deposit rates for one-year deposits have risen from less than 1 percent in 2020 and 2021 to more than 5.5 percent.
Longer terms have followed a similar trajectory, but rates have started to soften since the start of this year.
Kiwibank recently cut some of its term deposit rates by between five and 20 basis points, taking the five-year rate for someone with $5000 to $9999 to 4.9 percent.
Westpac reduced its 12-month rate by 20 basis points (bps) and its eight-month rate by 10bps, but increased its five-month by 20bps and its six month by 10bps.
BNZ chief economist Mike Jones said people should expect term deposit rates would move roughly in line with the official cash rate and broader interest rate cycle.
BNZ expects the rate OCR to move down in 25 basis point increments, taking it from 5.5 percent to 3.5 percent by the end of next year.
But he said it was still unlikely that rates would drop as low as they were before the pandemic.
Gareth Kiernan, chief forecaster at Infometrics, agreed.
"The expectation at this stage is we are in a higher inflation, higher interest rate environment than prevailed through the 2010s when you had inflation surprisingly low for a long period of time and it was almost like China was exporting deflation."
Chris Tennent-Brown, a senior economist at ASB, said he expected all term deposit rates to drop below four percent over the course of 2025 and 2026.
"Savers need to trade off locking in the current rates versus their need for flexibility. There is also the tricky trade-off between locking in the higher short-term rates, versus the lower long-term rates. Many savers don't like locking in the longer terms, for all sorts of personal reasons. But based on our forecasts, the longer terms do have some appeal now, if our forecasts of lower rates over the next few years proves correct."
But Jones said it was worth noting that although interest rates might fall, a return to lower inflation was good for savers.
"As inflation continues to come down, 'real' or inflation-adjusted term deposit rates will likely fall by less. And it's these rates that are probably more important for savers."
Dean Anderson, founder of Kernel, said people should be able to get a better return from a conservative managed fund if there was a fixed interest allocation or exposure to bonds.
"In short - 'bonds are back' is the mantra. A couple of years ago, there was no interest in fixed interest/bond funds. Now, with yields higher and the potential for capital gain as rates fall, they are an attractive asset class. Interest moving out of term deposits can look at conservative funds, as well as bond funds."
He said Kernel had launched target maturity bond funds in recent months.
"Investors and advisers often buy direct bonds, that they get a set income from and then matures and pays back capital. The other option was to buy a bond fund, but they never mature and are marked to market. We have two funds in our series, which will grow to a full suite of about five or six options soon, gives investors the best of both - a diversified fund that gives them PIE tax benefits, but the fund matures and pays back out the capital. We have a set quarterly distribution from these funds too - 1.5 cents per unit per quarter, which is roughly a 6 percent income yield."