How Interest Rates Effect Term Deposits
The Reserve Bank of Australia (RBA) sets interest rates to influence the Australian economy. These rates provide Australian banks with a benchmark for wholesale capital that they access locally and overseas to fund their own investing activities (e.g. mortgages, car loans, credit cards etc.)
There is not a direct connection between interest rates and Term Deposit Rates, however there is a strong correlation between the official cash rate and what banks pay their Term Deposit customers.
The banks in Australia such as Commonwealth Bank, NAB, ANZ, St George, Westpac, Suncorp, Bank of Melbourne, Bank of Queensland, and Citibank all seek to maximise returns to shareholders, and one of the ways they achieve this is by keeping their cost of capital low.
Term deposits are a form of wholesale funding for the bank – investors deposit their money in exchange for a fixed rate of return, and the bank invests this money to make their margin, and they keep the difference. Therefore, term deposit holders are effectively financing the bank’s investment activities.
When interest rates drop banks can access wholesale capital cheaper. This means they don’t need to pay their term deposit holders as much due to being able to source cheaper capital elsewhere. As a result bank term deposit holders are worse off whilst the bank continues to make a healthy margin.
Similarly, if the official cash rate increases, so does the cost of capital for the bank. Term deposit rates are often increased, though in the banks own time, to recognise the fact that the general cost of capital has gone up, meaning investors are rewarded with higher rates.
The key question is whether or not term deposit holders are receiving a reasonable return given the banks use their money to make enormous profits. It’s great if you are a shareholder but potentially questionable as a term deposit holder.
IPO Wealth’s rates have never changed due to changes in the official cash rate. We believe in providing investors with the opportunity to target higher returns as a way to keep ahead of inflation and earn an income stream from their investment. IPO Wealth is not a bank and our offering has a different risk profile to those of banks and other cash investment products, however many savvy investors across Australia have made the switch to IPO Wealth to boost their income potential.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.