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Rate rises unlikely to benefit deposits

Who knows whether there will be another interest-rate cut, even the Reserve Bank admits it doesn't, but already the market has moved on.

Who knows whether there will be another interest-rate cut, even the Reserve Bank admits it doesn't, but already the market has moved on.

It's decided the next move will be up and will be about this time next year.

The evidence is in both futures interest-rate contracts and rising government bond yields. What's more, these are punting on not one rate rise but two or, more likely, a double-barrelled one, which is the Reserve's modus operandi when it's changing course.

Even if the market is right, that doesn't mean deposit rates will go up as much. The banks are tightening the squeeze on depositers as they adjust to sluggish lending. They've been quietly reducing the premium above wholesale money market rates that they've been paying on term deposits. This has fallen from 1.25 per cent at the start of the year to 0.75 per cent, according to Bell Potter's research analyst, Damien Williamson.

The reason is the banks are no longer desperate to pull in more money, as potential home buyers are showing an aversion to debt. The cost of borrowing offshore has also dropped.

Meanwhile, the banks are up to their old trick of offering decent returns on only a couple of specially chosen term deposits. These are slashed the second they mature in the hope that you will automatically roll your deposit over into the same term paying only half as much.

Last week, Westpac, by no means the only offender, slashed its three-month term deposit from the 3.65 per cent you would have got back then to 2.50 per cent.

That's akin to almost five Reserve Bank rate cuts, yet there had been only one.

When 3.65 per cent was being offered in July on three and five-month terms, it seemed a no brainer, considering most other terms were 2.75 per cent, including the maturities on either side of it.

It's amazing the difference 30 or 31 days make. Going shorter or longer than three or five months would have cost you almost 1 per cent in interest.

But here's the rub. If you let your term deposit automatically renew, as the bank hopes, the return drops to 2.50 per cent.

Sneaky, eh? You'd be better off going in its online call rate of 2.50 per cent and keep some flexibility.

Or shop around. ME Bank, for instance, pays more, with a much smaller divergence between maturities.

How can the market be so sure rates will rise next year? Easy. By then the United States will have reined in its monthly target of buying bonds designed to inject money into the economy and keep rates down. That will lift bond yields, which will flow on to rates in international capital markets.

Indeed, US rates, except for the near zero interest the central bank charges banks, have been rising for some months.

The other sign is the Reserve Bank has toned down its rhetoric about the dollar being overvalued. Although it still thinks this, it's fretting less, because of a more upbeat view on the economy. Fair enough. If the economy is strengthening, the dollar should follow suit and so there's no need to cut rates to keep it down. The question is whether stronger confidence remains as the dollar gains ground again.

The market thinks it will but the Reserve Bank is keeping an open mind just in case.

Read David Potts in Weekend Money, with

The Sunday Age.

Twitter @moneypotts

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