Savers strike gold with interest rates

By By Anthony Keane, News Limited newspapers, 1 February 2010

THERE hasn't been a better time for savers in 10 years as the banks increase their term deposit rates in their fight to attract cheaper retail funds.

A BATTLE by banks and other financial institutions for investors' deposit dollars has given savers their best relative returns for at least a decade.

An analysis by financial comparison firm RateCity.com.au has found that for every one of the past 12 months, the average one-year term deposit interest rate has been above the Reserve Bank's official cash rate - something that has not happened since before 2000.

Currently, 12-month deposit rates are paying up to 6.3 per cent a year while online savings accounts are up to 5.51 per cent, RateCity says.

The rates are not as high as they were back in early 2008, but the RBA cash rate was 7.25 per cent then (compared with 3.75 per cent now) and inflation, which erodes the value of cash in the bank, was also higher.

The chief executive of credit union Community CPS Australia, Kevin Benger, says the higher rates should continue, at least in the short term, as financial institutions avoid tapping global financial markets for money.

"Everybody is fighting for the retail deposits now because it represents a cheaper source of funds," Mr Benger says.

"Before the global financial crisis they were getting wholesale funds at ridiculous rates and they didn't have to worry about term deposits or savings accounts.''

"A lot of people, including politicians, seem to forget that a large percentage of the country haven't got a home loan. "As savers move into retirement, somebody should think about them,'' Mr Benger says.

RateCity chief executive Damian Smith says banks traditionally have not relied on household deposits, but now realise the potential for profit.

"The theory is simple. If they're offering aggressive interest rates, the chances of converting that customer into a lifetime customer are pretty high, and therefore they should make a good profit on that customer over their lifetime,'' Mr Smith says.

He does not expect the high savings account interest rates, in relation to the RBA cash rate, to last for the rest of this year.

"They won't be bringing rates down,'' he says. "They just won't move them as much and will let RBA rate rises catch them up.

"However, the bottom line is the next six months remain a good time to be a saver.''