2017 was a year in which the official cash rate remained unchanged at the record low level of 1.75%.
And that lack of change was reflected in term deposit rates as well.
However, it must also be noted that term deposit rates stayed well above the OCR level. And there was no slipping lower over the whole year.
Short term rates – we will use the six month duration as the indicator – pretty much ended up where they started. The average of the five main banks started at 3.31% and ended at 3.30%. The average of the smaller banks started at 3.28% and ended at 3.25%.
But it was competitive pressures that brought the better returns; six month rates topped out at 3.75% with the Kiwibank offer in February. At the end of the year, Heartland was offering the highest rate for this term at 3.45%.
Believe it or not, the range was wider in 2017 for a one year term deposit. ASB and Westpac focused their offers elsewhere and left their one year offers low, although Westpac hit the market with a surprisingly generous (in the context of this market anyway) 3.75% for a very short burst in December. SBS Bank went one better.
Otherwise it was Kiwibank who was keenest in the one-year duration. It has to be said though that the rate premium for one year over six months was pretty minor.
Remember, sub 4% rates in the one year duration has extended now for more than two and a half years, and is starting to look more like ‘normal’. Rates this low are not ‘normal’ however – it is the recent period that is the aberration. Savers will be asking: when will it pass?
There was more on offer for a longer duration. The two year offer of 4% from TSB for most of the year stood out. And at this term, there was very little between any of the rivals, main bank or challenger bank.
For all that, term deposit savers had to cope with essentially unchanged rates from levels we saw in 2016; with the added disadvantage that bank offers changed less frequently making management of a TD portfolio just that frustratingly more difficult.
The banks put subtle pressure to go longer. The premium from one to two years averaged under +20 bps at the start of 2017, but more than doubled to over +40 bps by October, before slipping bank to just over +30 bps at the end of the year. Is +30 bps enough to entice you to lock your funds up an extra year to two years?
With the ‘experts’ suggesting that the OCR won’t change much in 2018 either, savers may be facing another year of similar circumstances.
Our separate review of risk suggests that financial markets don’t price in much risk premium for political uncertainty and change. Nor are they demanding the risk premiums they used to for the more esoteric options. But some unexpected ‘jolt’ may change all that, and in a hurry. Or it may not, if recent history is any guide.
Remember, “you can’t go broke making a profit” so financial decisions are best made with the information and perspectives you have at the time you need to make them. Second guessing the future is like gambling and not a wise move for financial decisions.
In terms of overall rate competitiveness, here is how these banks positioned themselves on average over all of 2017, and at the end of the year for a one year term deposit:
|relative price competitiveness||2016 average||2017 average||year-end|
|one year term deposit only||rate %||rate %||rate %|