Competition for term deposit business has been heating up with a good old fashioned rate war breaking out.
When interest rates were low the banks were prepared to slug mortgage holders any RBA rate increases but the poor deposit holders, well they were left largely in the cold. But that could all be changing thanks to a rapid rise in interest rates, a few banking issues abroad and nervous credit markets.
Term deposit rates in Australia are typically determined by a combination of factors, including the current cash rate set by the Reserve Bank of Australia (RBA), the supply and demand of funds in the market, and the individual bank’s cost of funds and profit margin.
Here are some key factors that may affect the calculation of term deposit rates in Australia:
- The RBA cash rate: The RBA sets the cash rate as a monetary policy tool to control inflation and stimulate economic growth. The cash rate directly affects the cost of funds for banks, which in turn influences the rates they offer on term deposits.
- Market competition: The rates offered by different banks on term deposits are often influenced by market competition. Banks may adjust their rates in response to changes in the market to attract or retain customers.
- Funding costs: Banks obtain funds from a variety of sources, such as customer deposits, wholesale funding, and capital markets. The cost of these funds will affect the bank’s ability to offer competitive term deposit rates.
- Profit margins: Banks also need to factor in their profit margins when setting term deposit rates. They need to balance the interest paid on deposits against the interest earned on their lending activities, and also cover other costs such as operational expenses and regulatory requirements.
It is points 2,3 & 4 that are really driving a rate war which could well extend if funding costs continue to rise and the market nervousness continues.
In Australia we have the guarantee scheme, called the Financial Claims Scheme (FCS), that provides a guarantee to depositors of up to $250,000 per account holder, per financial institution, in the event of a bank failure. It might be easier to use your regular bank, but the rates could well be better outside of the big 4 so don’t be afraid to branch out if you can still retain the guarantee.
It’s important to note that term deposit rates can vary widely between banks, and also depend on the specific terms and conditions of the deposit, such as the length of the term, the amount deposited, and any other features and fees of the account. Lookout for exit/withdrawal penalties as these can have an impact if you nee to break a deposit.
If you need some assistance as always, please reach out to Handan or Simon.
Disclaimer: This page may contain general advice. It does not take account of your objectives, financial situation or needs. You should talk to a financial adviser before making a financial decision. This has been prepared by Dollar Growth Financial Advice Pty. Ltd refer to the Financial Services Guide for details. While care has been taken in the preparation of this, no liability is accepted by Dollar Growth Financial Advice Pty. Ltd, its related entities, agents, representatives, employees for any loss arising from reliance on the information contained herein.
