Bank depositors fight back

The victims of the drive to stimulate the Australian and global economies have been longer-term bank term deposit investors and others who rely on longer-term fixed interest investments.

Last night across my desk I saw the first signs of a deposit fight-back as a major regional bank lifted longer-term deposit rates in response to an exodus of term deposit money. We are seeing similar signs in the US via the bond market.

Almost every Australian economist forecasts that our official Reserve Bank interest rates are going to fall – it's merely a question of how far and when the reductions will take place.

With past reductions, as the popular press demanded mortgage rate falls to match the lower official rates, Australian bank term deposit holders copped it in the neck. We could therefore expect more of the same. Indeed the process has become an income switch from older people who need income to younger people who have mortgages.

But the oldies are fighting back. They are switching their money out of maturing term deposits into bank shares and other high income investments. This has been a huge driver of the share market.

In the first week of 2013 a friend went along to his regional banker (his transaction bank) looking to roll over six figures in term deposits. He accepted the going rate of 4.2 per cent for six months and 4.6 per cent for four years. They were poor rates but were in line with what other banks were offering. After 10 days of reading about looming lower rates the same friend this week fearfully went along to the same bank to roll over similar amounts of money in a separate transaction. He braced himself for another hammering.

Because the term deposits were part of a complex loan security there was no threat of withdrawal. So imagine his surprise when the six-month rate was hiked from 4.2 to 4.4 per cent and the four-year rate from 4.6 to 4.75 per cent.

Australian banks have an aim to replace overseas borrowings with local longer-term deposits. When term deposit rates were above 5 per cent self-managed funds could gain a reasonable return so bank deposits soared. However the closer the rates got to 5 per cent the less economic long-term bank deposits became.

Once they went below 5 per cent, long-term bank deposits were far less attractive as an investment for self-managed funds. And remember that 50.7 per cent of superannuation money that funds retirement is invested via self-managed funds (DIY super funds humble the majors, November 26).

As deposits have matured there has been a spectacular rise in bank shares as well as other high income shares like Telstra as the self-managed funds exited maturing bank deposits. This morning I see that four-year term deposit rates from major banks are at around the 4.5 per cent mark, which is close to the rate offered by the regional bank 10 days ago. The move to 4.75 per cent is therefore significant.

In the six-month deposit space the regional has still not caught up with National Australia Bank's UBank, which is offering 4.76 per cent, but it is way above the big four, some of whom are insulting the intelligence of their clients with offers around 4.15 per cent.

Unless banks are prepared to go overseas for their long-term deposit money they are going to have to think twice about shifting rewards from savers to borrowers to comply with Reserve Bank dictates and popular press pressure.

Meanwhile, in the US there is a clear stirring in the bond market as money shifts to shares. Increasingly, interest rates are a currency play rather than an economic stimulation game.