More bad news for term deposit holders

Term deposit rates are rising but an increase in inflation means it is unlikely that conservative savers will see any real benefit and could even slip further behind.

Chris Tennent-Brown, ASB wealth senior economist, said longer-term deposit rates had risen significantly in recent months. Banks are now offering five-year term deposits paying up to 2 per cent a year, from a low of 1 per cent.

But he said, even at that new higher rate, it would not keep up with inflation over the next year, which is running at an annual rate of 3.3 per cent. That meant the value of savers’ money would erode in real terms each year.

Term deposits have become less popular in recent years due to the low returns offered but some retirees in particular still keep their money in them due to the low risks associated.

‘‘Ten or 15 years ago you could get ahead with a term deposit but now that is not the case,’’ Tennent-Brown said. ‘‘It is a tough environment for conservative savers. The longer-term rates have lifted a bit but they are still nowhere near our inflation forecasts. That is the bind.’’

Between 2012 and 2020, interest rates had been low but inflation was virtually non-existent, leaving investors better off overall. ‘‘Now we are looking at pressure on supply chains, we could have 3 per cent or 4 per cent inflation for a couple of quarters, term deposits are definitely behind now.’’

He said, based on official cash rate forecasts and the outlook for the economy, it was likely that term deposit rates would increase but remain significantly below the longer-term averages. The 10-year average for six-month deposits is 3.27 per cent. For oneyear terms it is 3.37 per cent and for five years 4.06 per cent.

He expected term deposit rates to settle in five years’ time at between ‘‘early 2 per cent and high 3 per cent’’.

‘‘If inflation goes back to being 1 per cent or 2 per cent that is a good story but for the next year or so, while in a nominal sense they have turned a corner, in real terms it is as tough as ever.

‘‘For savers, these expectations of historically low term deposit rates have major implications. We acknowledge that people are rightly concerned about the significant income drop caused by the lower interest rates available today compared with earlier years.’’

Infometrics is picking sixmonth term deposit rates to rise to 2.07 per cent by the end of next year and 2.3 per cent by early 2024.

‘‘They are closely related to the official cash rate, so even if you are talking about a 1.5 percentage point lift over the next 18 months or so, you are only getting up towards mid-2 per cent,’’ said chief forecaster Gareth Kiernan.

‘‘Pretty much all other investments are going to look more attractive if people are still seeking yield, even if housing and shares are at risk of getting more overvalued.’’