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Stuff article: Why are deposit rates so low when home loan rates are rising so fast?

People with deposits in the bank are getting half the return they were two years ago, but there could be good news on the horizon.

While plummeting interest rates eased the burden on borrowers, Covid has been hard on savers, and people with money in the bank have faced negligible returns, data from the Reserve Bank of New Zealand Te Pūtea Matua​ shows.

The central bank lifted the official cash rate (OCR) by 25 basis points on Wednesday, which prompted ASB and ANZ to increase some of its savings account and home loan rates by a similar margin.

Freelance economist Tony Alexander​ says since the Covid pandemic struck, the gap between term deposit rates and home loan rates has widened, and that was capitalism at work.

“Banks are not short of money to lend out, so they don’t need to compete aggressively,” Alexander says. “They are awash with funding.”

But economist Brad Olsen from Infometrics says local deposits will become more important for banks when they face higher capital requirements next year.

In October 2019​, the average one-year standard home loan cost 4.35 per cent​, compared to the average six-month term deposit of 2.73​ per cent, a difference of 1.62​ percentage points.

But after aggressive cuts in the OCR by the Reserve Bank, the gap between the six-month term deposit rate, and the one-year standard home loan rate had widened to 2.5​ percentage points by October this year.

Improvements in the margins between the cost of bank funding, and the rates at which banks could lend money, was cited by Westpac and ANZ when they announced strong profits several weeks ago, delivering after-tax profits of $1.01 billion​ and $1.91b​ respectively.

It wasn’t only the Reserve Bank that had helped flood banks with cheap funding, Alexander​ says.

Nervous households and businesses boosted their savings in banks as insurance against hard times.

“People like the flexibility of money in the bank,” Alexander​ says.

The difference between the lending and deposit rates is just capitalism at work, he says.

That data showed a depositor with an average six-month in October was getting just over 48 per cent​ of the return they were getting two years earlier, despite inflation having spiked sharply, pushing the real return deep into negative territory.

Economist Brad Olsen​ from Infometrics​ has been tracking the depositor-borrower gap, using a slightly different measure.

“I’ve looked at one-year fixed [home loan] rates and one-year term deposit rates,” he says.

The home loan rates were “special” rates for people with more than 20​ per cent equity in their homes.

“What they show is that savings rates have fallen further than borrowing rates through the Covid period, as other funding sources made banks less reliant on deposit funds,” Olsen says.

Mind the Gap

Economist Brad Olsen charted the gap between one-year 'special' home loan rates, and one-tear term deposit rates. The gap has widened significantly during the Covid pandemic.

But depositors may soon become more important to banks, and that could lead to a better deal compared to borrowers.

“With deposits going to become more important for banks heading forward, we expect there to be upwards pressure on term deposit rates and similar. But, given where inflation sits, term deposits will still be providing a loss in real purchasing power terms,” Olsen says.

The margins between six-month deposit rates, and the interest banks charge on credit card and overdraft debt had also widened between October 2019 and October 2021.

Borrowers using the average two-year fixed rate standard home loan from banks were paying an average of 4.41 ​per cent in October compared to 4.22​ per cent in October this year.

The effective average interest paid by borrowers with interest-bearing debt on their cards rose from 17.8​ per cent to 18.1​ per cent, over the same time period.

The average SME overdraft rate dropped from 9​ per cent to 8.35​ per cent.

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