Is it time to jump on the term deposit ladder?
Here’s a strong view: it’s time for savers to lock in longer-term fixed-rate deposits. I don’t mean this in leisurely fashion either. I mean promptly.
No commentator ever thinks they’ll get a call completely right, or perfectly timed, but you know when you’re roughly there and seeing enough signs to take action.
The market-leading one-year rate just hit 6.5% (SBS), 18 months 6% (Rabobank), three years 5.60% (ASB and Rabobank) and five years 5.55% (Rabobank).
It's time to get excess savings out of short-term accounts and think hard about what to do with any maturing funds. The table-topper from SBS is a bit of an outlier and BBB-rated. It seems desperate for short-term funding. For savers, a one-year fix looks like a red herring to me.
Don’t fear the five-year deposit
Drilling down a little more, I believe three-year and five-year deposits are at the most risk of falling. Personally, I’d be rolling into those options if I had a bit of money coming up to maturity this month.
Many savers who rely on term deposits fear the longer-dated options. Some of it comes down to green-banana syndrome – the older you are, the more you avoid these purchases, in case you’re not around to see them ripen. For others, it’s the appeal of a higher one-year rate.
Don’t fear the big five-year or the three-year. These are looking good and will add some nice stability to a ladder of deposits.
“Laddering” is the best method for anyone using term deposits. It’s very simple: divide your money into portions and invest in all the different maturities. That way, when crystal ball rubbers like me are wrong, you always have money maturing regularly and can spread the risk.
At the moment, I’d choose to overweight the three- and five-year options in a new ladder. And remember to negotiate – banks are more like Harvey Norman than you think.
What indicators point to this view?
New Zealand inflation is steady and the Reserve Bank has held the official cash rate.
That acts as an anchor for short-term savings accounts, but it doesn’t stop our longer-term interest rates reacting to inflationary pressures in the rest of the world, namely the US where rates have kept rising. It’s pushed up our fixed-rate loans and deposits.
These fixed rates are supposed to be a reflection of what the Reserve Bank’s official cash rate will average out at. The interest rate curve slopes downwards at the moment, telling us the market believes the average cash rate over this period will be lower than its current level. It normally indicates a recession is brewing.
Wholesale fixed rates are very reactive to every smidgeon of economic data. They will predict the Reserve Bank reducing interest rates well before it happens. At the moment, offshore markets are holding them up. One more rate rise in the US and Australia is possible, and three more in the UK, even if we stay flat here.
New Zealand is moving along the top of a hill, with a bungee attached to the countries still chugging up to the summit. There’s that last pull to go and we might see a gentle easing of rates worldwide. But the minute the markets predict it, it’s too late.
Right now, they’re predicting static rates well out into 2024. It feels like there’s not enough definitive data around to predict anything else, rather than it being a likely outcome.
We’re getting to a pinch point where offshore markets will complete their rate increases and I believe the bungee will loosen with a drop in our three- to five-year fixed rates.
Whatever you do, don’t interpret my comments as interest rates heading sharply downward. They might peak and ease, but I still think higher rates are here to stay for longer than most people think.
A reversion to 2% inflation is a long way off. We are entering a new period of permanent demographic changes. The ageing population is a force slamming into us. It results in tight labour markets and a lack of labour, adding to wage inflation.
The world’s spending ‘boomers’ (debt free and unaffected by interest rates) add to demand-driven inflation. Controlling this with interest rate rises is becoming less and less efficient, due to the dual force. It’s like watching central banks trying to put out a house fire with wet tea towels.
This is a new era, but economists seem too entrenched to advise politicians on a range of tools to remove money from our pockets. It appears difficult to advocate for another imperfect solution, even if it would work more quickly and spread the pain more fairly.
Best of the big banks
Things move constantly, so always check a reliable comparison website such as www.interest.co.nz.
Five years: ASB 5.35%
Four years: ASB 5.45%
Three years: ASB 5.60%
Two years: ASB 5.70%
18 months: ASB 5.75%
One year: Kiwibank and BNZ 5.90%
Janine Starks is the author of www.moneytips.nz and a financial commentator with expertise in banking, personal finance and funds management.