Savers need to act fast. With the RBA cash rate dropping a massive half a per cent it is only a matter of time before the cut flows through to deposit rates.
Data provided by Mozo shows that the banks are competing aggressively for short term funding right now, and that the best rates are to be found on deposit terms of six months or less, rather than longer one and two year terms.
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Mozo MD Rohan Gamble said, “The top six month term deposit rate right now is sitting level with the top variable savings account rate at 6 per cent. So savers who switch their money into a term deposit within the next few days should be able to lock in a rate of up to 6 per cent and effectively beat the rate cut for the next six months.”
The average six month term deposit rate from the Big Four banks was just 3.79% in April 2010, well below the market average of 5.21 per cent. Today, the average Big Four rate for the same term is 5.46 per cent, which is higher than the market average of 5.25 per cent.
Mr Gamble said, “The Big Four are effectively paying 2% more interest on six month term deposits than they were two years ago, but the picture changes dramatically when looking at longer term funding. One and two year deposit rates have fallen over the last two years.”
“Clearly, short term funding is hard for the banks to come by, and this is where they are competing most aggressively right now. There is absolutely no evidence that they are competing hard on deposit rates above six months," says Mr Gamble.
Competition for funds is now the name of the game and this is reflected in the rates offered by some of the more competitive financial institutions.
Top Six Month Term Deposit Rates*
||Bank of Queensland
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* Based on a $25,000 deposit.
Mozo has also tracked savings account rates against the cash rate over the last two years and found that base rates for both standard savings accounts and online accounts have become more competitive.
In both April 2010 and April 2012, the official cash rate sat at 4.25%. In April 2010 however, standard savings accounts were paying a base rate of just 3.2%. By April 2012 this had increased to 3.99%. The average online savings account rate increased over the same period from 4.07% to 4.44%.
“We expect savings account rates to drop over the next couple of weeks, but it’s likely that savers will be spared the full 50 basis point cut,” Mr Gamble said. “The banks are struggling to grow their deposit books and it’s not at all out of the question that they will take a small hit to their margins and spare savers the full cut.”
Brisk competition for retail funds is clearly going to benefit savers over those with variable rate mortgages. RateCity has reported that “the major four banks had passed on around 80 percent of the cash rate reduction to variable rate home loan customers since November. However, term deposit rates (using the popular three-month term) have only come down by around 20 basis points on average across the major banks – which is around 40 percent of the cash rate reduction”.
In relation to the Reserve Bank rate drop Damian Smith, RateCity’s CEO said that “it’s likely that base rates for at-call savings accounts will follow, although there will still likely be very competitive “bonus offers” for new customers and for significant monthly net additions to your account.”