Banks aren't yet under enough pressure to lift deposit rates meaningfully. Photo / NZME
Mortgage and term deposit rates are expected to keep rising as central banks around the world lift interest rates to try to dampen inflation.
But term deposit rates aren't expected to increase by as much as mortgage rates – for the next few months at least.
Banking sources the Herald spoke to explained that the environment is such, banks don't need to work too hard to attract funding from depositors to meet demand from borrowers.
Rising interest rates are causing people to pull back from property and equity markets. Borrowing is expensive and central banks' aggressive tightening of monetary conditions are causing volatility in equity markets.
So, demand for debt isn't growing by as much as when interest rates were very low. Meanwhile, bank deposits are becoming relatively more attractive.
Sources the Herald spoke to also suggested there was capacity for banks to lean on wholesale money markets for funding.
Once this option has been maximised, the end of central banks' tightening cycle is in sight, and people get ready to borrow more again, banks may need to start working harder to attract funding from depositors.
Accordingly, a former Westpac treasurer turned consultant, Jim Reardon, only saw term deposit rates picking up more substantially early next year.
Because banks haven't been that active in wholesale markets for a couple of years, Reardon believed there was capacity for them to tap into them more.
"They'll want to get back into a regular funding cadence in those wholesale markets – particularly the offshore markets – so they'll start to build those up," Reardon said.
"Therefore, they don't need the term deposit market at the moment."
Reardon noted banks aren't competing aggressively on term deposit rates.
Indeed, ANZ on Friday lifted some lending rates by 50 basis points, but only lifted the rate it pays on 'Serious Saver' balances by 40 basis points.
Asked why it didn't offer savers more, an ANZ spokesperson provided a response that aligned with Reardon's.
"It's important to remember that banks get their funds to lend to New Zealanders from a variety of domestic and international sources, and local deposits are just one," the ANZ spokesperson said.
"Depending on demand for lending and funding pricing, sometimes we need local deposits more than overseas sources and vice versa.
"Right now, the heat has come out of the real estate market, and we are increasingly seeing customers use term deposits to save ...
"Also, currently around 90 per cent of ANZ mortgages are on fixed rates and that impacts our funding requirements."
Reserve Bank data shows that since the Reserve Bank started lifting the OCR in October 2021, the value of households' deposits has been growing more quickly than households' borrowing.
The value of households' deposits rose by $17 billion between September 2021 and 2022. Meanwhile, the value of their loans only grew by $14b.
Another factor is that the Reserve Bank will in December stop lending banks newly printed money at the OCR via its Funding for Lending Programme.
Banks have collectively borrowed $15b via this programme to date, established in December 2020 to ensure banks had a source of funding if record-low interest rates saw them struggle to attract deposits.
Independent economist (formerly at BNZ), Tony Alexander, believed the drying up of this funding source would only put a little bit of extra pressure on banks to raise deposit rates to attract funding.
Six-month term deposit rates on offer currently range from around 3 to 3.75 per cent, meanwhile one-year rates range from around 4 to 4.5 per cent. Some of the smaller banks are offering more attractive rates than the big four Aussie players.
Looking at the big picture, Alexander believed that once the Reserve Bank is done lifting the OCR, mortgage rates will have gone up by more than deposit rates.
"The world is still awash with money looking for a home. There has been a lot of printing of money around the world since the Global Financial Crisis, and in New Zealand as well. So that's still going to be sticking around in … bank accounts for a while," Alexander said.
"When you see the high volatility of asset markets, I can't help but think a lot of people are going to be quite happy to keep money sitting in their bank accounts well into 2023 because of uncertainty about what's going to happen with share prices, property prices."