Inflation new drain on returns

Interest rates might be rising but a pick-up in inflation means it’s more important than ever that investors do not just leave their money in the bank, commentators say.

Wednesday, May 17th 2017, 6:00AM

by Susan Edmunds

Chris Tennent-Brown, ASB senior economist

Both Westpac and ASB have increased the rates on offer for their longer-term deposits.

ANZ made similar moves earlier in the month.

Westpac's chief executive, David McLean, said in announcing his bank's results that competition for local deposits was likely to drive up the rates on offer for those with money to put in the bank.

When interest rates fell dramatically after the global financial crisis, some advisers reported an increase in inquiries from investors wanting somewhere else to put their money.

But ASB senior economist Chris Tennent-Brown did not expect to see them return to the safe harbour of term deposits now that rates are rising again.

He said inflation had lifted significantly from close to 0% a year ago to more than 2% now.

“That lift in inflation more than offsets a lift in interest rates. Inflation is back as a real eroder of term deposit returns.

"A year ago we could say I know rates are low but inflation is next to noting, at least you are getting the full purchase price of your money back when you get it from the bank. But now inflation is higher you need to be careful it’s not eroding your return. It’s a worse environment than six months ago because of inflation, even though rates have gone up.”

Adviser Stephen O'Connor said it would take a significant interest rate increase to tempt clients back to term deposits.

"Even then I don't see why clients wouldn’t continue to maintain an appropriate mix of cash, term deposits/bonds, property and shares designed to meet their objectives.

"Where increasing term deposit rates may change investor behaviour is in the trade-off between term deposits and bonds. If term deposit rates provided a sufficient margin over bonds to compensate for their illiquidity then investors may favour TDs over bonds to a greater extent than normal."

David Boyle, of the Commission for Financial Capability, said many New Zealanders sought term deposits for security rather than returns.

He said there was a generation of people who had been burned by finance company collapses.

"If interest rates are up it might give them more confidence to keep their funds there but the overriding factor is the return of the money, rather than the return on it."

Tags: term deposits