Term Deposit Rates Could Reach Floor Soon After RBA Cut

Tuesday, May 3rd, 2016

The recent cut by the RBA in Australia benefited many with mortgage balances as the big banks mentioned to cut loan rates, while for many self funded retirees who had term deposits to rely on for their fixed income portion of their portfolio could face continued falls. According to news.com.au, retirees could stand to lose as much as $1250 on a 12-month term deposit of $500,000, or $625 on a $250,000 term deposit.

However while banks could cut deposit rates by the full 0.25%, their could be a looming natural floor on deposits, banks will be under pressure because while deposits can be reduced, the low returns could provide disincentives to customers to keep customers cash within the bank.  

Deposits account according to SMH about 60 per cent of a banks funding with them having reported that deposits have been shifting to zero-rate transaction accounts.

According to Westpac their is pressure to actually raise deposit rates now because of wholesale funding cost increases have forced banks to seek more funding from deposits, which raises competition there.

So while many Australian pensioners and self-funded retirees who hold term deposits may see rates fall, increase competition as well funding requirements may see a natural floor. This natural floor could possibly keep rates unchanged for a period of time, similar to the United States according to Deposits.org, where some deposit rates for some of the larger banks have hardly moved in 1 year.



Article by James Jones

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com

Tags: term deposit

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