Investor Education Centre > Bank Products > 3 Reasons why Term Deposit Rates are so low in Australia

3 Reasons why Term Deposit Rates are so low in Australia

Term deposit rates are at historical lows at present (March 2019) where most banks are offering fixed term deposit rates in the range of 1.8%-2.8% per annum. Here are 3 reasons why the rates offered by Australian banks such as Commbank, NAB, ANZ, Westpac, Bendigo Bank, Macquarie, Citibank and others are so low:

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1.  Banks need to keep their shareholders happy by making profits

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Even though banks are capable of paying rates much higher than those on offer, they don’t in order to maximise profits and keep their shareholders happy.  With publicly quoted stock prices for most major banks, shareholders seek capital growth and dividends which are largely generated from the margin earned. 

This margin is the difference between the cost of the capital that banks have on hand (including term deposits) and the amount they effectively on-lend this money for (often in the form of home loans, car loans, credit cards etc).

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If the banks don’t meet shareholder expectations they run the risk of investors selling off their shares, which can negatively impact share price.

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So low term deposit rates are great for the shareholders, but certainly frustrating for those whose money is leveraged by the banks.

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2.  The Reserve Bank of Australia’s Interest Rates are Low

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Banks often adjust their term deposit rates as the official cash rate changes.  Australia is experiencing one of the longest periods of low interest rates in history with the RBA keeping rates unchanged at 1.5% for over 30 consecutive months. 

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The official cash rate is a benchmark for banks accessing wholesale funding to supplement their bank deposits (which predominantly comprise transaction accounts, savings accounts and term deposits).  If the cost of wholesale capital reduces, banks have no incentive to pay higher rates to those that keep their money with them as they can source cheaper capital elsewhere.

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3. Low Cost of Capital Internationally

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Many developed countries are experiencing low interest environments including the United Kingdom and parts of the European Union. Banks source capital from overseas markets from time-to-time, and if overseas rates are low, banks don’t need so much money from term deposits, hence the low rates offered.

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Banks use the rates they offer on term deposits as a lever to boost their cash reserves (e.g. if they wanted to do more lending).  Again, it doesn’t reflect the fact that those with money in savings accounts or term deposits are effectively financing the banks to make eyewatering profits.

If interest rates continue to stay low locally and internationally it is unlikely we will see any improvement in term deposit rates offered by the banks, if anything there is a strong probability they may decrease in line with interest rates being decreased by the RBA.

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As an investor who is wanting to generate a better return than the rates offered by the banks, you may like to consider non-bank alternatives that offer term-based investment solutions.  IPO Wealth is one of these options that provides investors the ability to invest for 3, 6, 12, 24, 36 and 60 month terms and earn monthly income distributions.  The product has a different risk profile to investing with a bank however we have investors across Australia that are delighted they made the switch. 

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