A term deposit is a good idea if you’re looking to put away some surplus funds into an investment for a set period.
With a fixed interest rate for the agreed term and minimal maintenance, this investment tool makes good financial sense. While the rate might be fixed for your term, if you consider historical term deposit interest rates, you will realise how the rates are influenced by the economy and keep fluctuating.
How does the economy affect the interest rate?
Typically the Reserve Bank of Australia (RBA) determines interest rates by using the cash rate, the official interest rate set by the RBA that banks charge or pay to borrow funds from other banks. These costs are then passed onto the saver.
With a low cash rate, banks find it to their advantage to borrow from the Reserve Bank of Australia and therefore don’t offer savers a high interest rate. And that means it might not be a good time to be thinking about a term deposit.
How long will a low cash rate keep term deposit interest rates low?
The cash rate depends on the state of the economy, and a low cash rate indicates a slow economy, amongst other things.
In such times, the RBA encourages businesses to borrow funds for investment, and that could help improve the economy. Once that happens, the cash rate also rises, and as a result, term deposit interest rates increase too.
A little bit about the history of term deposits
A review of Australian term deposit historical rates shows that term deposits have undergone significant changes over the last many years. To a large extent, their changes can be attributed to the following significant changes in the modern financial market as well:
- Absence of competitive interest rates: Earlier banks turned to wholesale bond markets for their funds, and there wasn’t much emphasis on term deposits. As a result, the market was not competitive. Today, since most of the bank’s funds come from customers who have invested in term deposits, banks can give better interest rates.
- Investor security is a recent phenomenon: Before the ‘deposit guarantee’, not many Australians were assured on the safety of financial products. With term deposits, investors were assured absolute security of their accounts, encouraging more people to open their own term deposits.
- Smaller lenders offered lower rates: Many of the smaller players, such as building societies, regional banks, and credit unions, turned to the securitisation markets for their funding. Thus, they could not offer competitive term deposit rates.
- The Global Financial Crisis: In response to the impact of the GFC on the Australian economy, the Australian government put in place a ‘deposit guarantee’ of up to $250,000 per person, per investment, in case an Australian bank failed and was unable to fulfil its obligations to its depositors. In exchange, the banks can now offer higher term deposit interest rates.
Are there lessons to be learned from historical term deposit rates?
How can you decide whether the current economy is good enough to open a term deposit account? Allow historical term deposit interest rates help you come to a decision. These lessons could offer you insights:
- There are more options today: Each lender offers slightly different features of its term deposit accounts. While your investment in a term deposit is typically at a fixed rate, today some lenders are willing to allow you to increase the interest rate during the locked-in period if the interest rates of the lender have increased. Some other lenders might allow you to gain access to your funds before the account reaches maturity, which was not the case earlier.
- Look for similar interest rates: Most banks today get a significant amount of funds through term deposits, and thus are able to offer competitive rates. Check whether that too-good-to-be-true high-interest rate isn’t just an introductory offer.
- Interest rates will fluctuate: The financial market is never steady, and this will impact interest rates. The rates move up or down, depending on the state of the economy. Consider the current economic situation to understand which way interest the rates are going before investing.