Are savers with term deposits being robbed in broad daylight?

This week a sonic boom ricocheted through the mortgage market with variable rates soaring above 7%. But for savers it’s still scraps.

What’s going on with interest rates?

Right now, a bank heist is under way.

It’s not the sort of operation you might be imagining with balaclavas and a loot bag, but a legal and very civilised event where savers are being robbed in broad daylight. No alarm bells are ringing and the savings police aren’t about to do anything.

The tightrope of affordability is at play for borrowers and their nervous bankers. This means they’re getting priority over savers. Rate-shock and wage increases need to form a similar cadence to keep lending books upright. Fixed rate deals protect many, but the banks know the pain will continue as these expire. This cycle seems likely to end around 9% for variable rate mortgages (based on predicted increases in the official cash rate of another 1.25% and the end of cheap money provided to banks by the government).

The negative deposit margin

With one-year wholesale rates around 4.75%, you’d expect to see retail offers of 5.75% for a term deposit. But savers are only getting 4.2% from the big Aussie banks and borrowers are being offered one-year fixes of 5.45%. While it doesn’t look odd, it’s significantly out of kilter.

At retail level, a “normal” looking market has both deposit rates and mortgage rates at higher levels than wholesale rates. That kind of defies gravity, but it’s the status quo in New Zealand. One-year deposits are usually about 1% higher than wholesale rates. That margin can even extend to plus-2% at times. Currently, the margin is negative.

The sacrificial lamb - savers

At times like this savers get sacrificed. We also saw a negative deposit margin back in 2008 in the Global Financial Crisis.

While rising rates might feel long overdue for deposit-holders, the current structure hugely favours borrowers.

Wholesale markets are still flooded with money. Property sales and demand for debt has slowed. The government has provided banks with a cheap intravenous line of money via its Funding for Lending Programme and they’re not removing the drip until December. Combine these factors and there’s no need to compete for retail deposits.

Banks don’t lend out our deposits

This news might come like a bolt of lightning, but our deposits don’t get lent out to borrowers. Financial text books have led us astray for years. Most of us believe banks take our savings at a low interest rate and lend out this money at a higher rate. It’s nice and neat. But it’s not true.

This misinformation makes us form a direct link between mortgage rates and savings rates. While it’s an easy mistake to make, it results in us getting all het up. While I believe savers are getting a raw deal at the moment, I still want to loosen the link between these rates in your mind.

When it comes to making a new mortgage or loan, it’s a case of double-entry accounting. The bank electronically creates money and deposits it into our account to buy a house or car. Each loan creates a matching deposit. It’s new money entering the financial system and it didn’t come from other customers’ term deposits or savings accounts.

When it dawns on people that banks can keep creating loans out of thin air, fairy dust or ex nihilo (Latin for creation out of nothing) emotions seem to waver between derision and excitement. But these descriptions aren’t quite right either.

Our future ability to repay a loan (our string of monthly payments backed up by our wages) is an illiquid asset that the bank turns into a liquid deposit for us to spend. I prefer the asset-backed definition, rather than fairy dust. Money creation isn’t limitless either. In order to engage in this activity, banks need liquid reserves as back-up for financial strength. Our deposits are for this purpose, not for lending itself.

Our deposits are also used in a different part of the banking system to balance the books and make the payments system work. Savers can be a cheap source of funds for this, but banks can also use the wholesale markets (other banks).

If you’re a saver who invests in term deposits, here are two tips:

Sticky money is a powerful consumer behaviour that allows banks to undertake these heists. Translation; you being a lazy saver who won’t shift deposits to another bank, is fuelling the problem.

Hang in there a few months (I’m guessing four to six months) and I think you’ll be rewarded with some higher rates. The government is winding up its Funding for Lending Programme which provides banks with cheap money. While it’s a small part of overall lending it’s still a dampener.

Janine Starks’ opinion is a personal view and general in nature. It is not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.