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The Death of Term Deposits

This year has been an interesting year to say the least, or as the Queen once said ‘Annus horribilis’, meaning ‘A terrible year’.  The pandemic has sadly taken over $1.4 million lives at the time of writing. COVID-19 has also claimed another unlikely victim, the humble term deposit.

Investors are leaving term deposits in droves. Reserve Bank of New Zealand (RBNZ) data shows the amount invested in term deposits has fallen by $17.58 billion NZD year on year. This equates to a 9.87% reduction in total term deposits. This is a monumental shift in the funding for our banks, so much so the RBNZ has had to step in and provide a “funding for lending programme”. Essentially, this programme replaces the funding that term deposits used to represent.

As a result of this new lending programme, term deposit rates have fallen significantly. A term deposit at ANZ Bank is now at a miniscule 0.90% for five years. With inflation currently running at 1.4% and that rate being before tax, it seems a long time to “invest” money for a guaranteed real loss.

The difference between the ‘nominal’ rate, i.e. 0.90%, and the inflation adjusted rate is called the ‘real’ rate of return. In ‘real’ terms negative interest rates have been applied to this investment vehicle.

The reason rates have been driven so low is supporting the economy which will result in increased asset prices. In turn this stabilises bank balance sheets and increasing resilience in the financial sector, so long as they don’t run too hard for too long. These money flows are making their way into the share-market, the housing market and on call savings accounts. The RBNZ has signalled that they are concerned with rampant house price growth and will look to reduce lending to property investors in the new year.

If you have term deposits maturing or excess cash and would like to discuss your options, please feel free to get in touch with the team. Your adviser will be able to steer you towards a suitable solution.

 

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