Term deposit rates will rise – is that where your money should be?

Term deposit rates might have a bit further to increase, but savers should ask themselves whether it is really the right place to put their money.

By Susan Edmunds of RNZ

As interest rates have risen, term deposits rates have inched up. In October last year, the average two-year rate was just over 3.5%, and the average five-year rate was just under 4%. Now, those rates are at 4.17% and 4.66%, respectively.

Shorter terms have moved less. The six-month rate has not moved according to the Reserve Bank data, while the one-year rate has picked up from 3.5% to 4%.

Over that time, the official cash rate has dropped from 2.5% to 2.25% and then lifted to 2.5% again. It will be reviewed next month.

BNZ adjusted its term deposit rates on Friday, moving its one-year rate to 4.05% and its 30-day rate to 1.85.

Bank of China lifted its two-year rate to 4.3%.

Squirrel chief executive David Cunningham said he expected the interest rate on short terms deposits to increase if the official cash rate did.

Chris Tennent-Brown, senior economist at ASB, said it was a difficult environment to predict.

"The underlying swap rates have been pretty volatile and US long-term interest rates have been pretty volatile as well."

He said if the Reserve Bank went ahead with lifting the official cash rate as expected this year, that would flow through to higher short-term deposit rates and shorter-term mortgages.

Some of the more popular rates were likely to move, he said, but the interest rates offered on long-term term deposits were likely to be more affected by inflation expectations and long-term rates here and overseas.

"There are a lot of moving parts ... we've got new things we wouldn't have been thinking about a week ago with the US Treasury Secretary talking about changes to the duration of the US mortgage market to try to get longer-term rates down there.

"People's fear of inflation is bouncing around as much as oil prices are. It's going to be an interesting six months."

He said people thinking about putting money into a term deposit needed to be sure it was the right option.

"If you don't need the money for five or 10 years it's probably worth having some conversations about whether there are better places to be than in a term deposit. Growth and inflation protection are key there. Inflation is still running ahead of what those popular short-term deposit rates are. So working out a strategy to beat that is really important.

"But if it's money for a deposit on a house that you're planning on buying over the next six months, then you just need that liquidity."