Lower inflation could be good for term deposit holders

26 October 2016
According to the most recent consumer price index (CPI) statistics released by the Australian Bureau of Statistics, Australia’s annualised inflation is still subdued at 1.3 percent – although slightly higher than its recent 17 year low of just 1 percent. Provided the Reserve Bank doesn’t use this as impetus to cut the official cash rate further, low inflation may be good news for term deposit holders.

Why is low inflation good for savers? Essentially, the reason for that is that low inflation translates to a higher real rate of return on cash savings, as the purchasing power of the funds is not being eaten away by inflation.

“If you’re receiving, say, a three percent return on your cash savings but inflation is running at three percent, the real return is nothing. But if you’re receiving a three percent interest rate against inflation of just 1.3 percent, at least there’s a two percent margin left over,” said Canstar Editor in Chief, Justine Davies.

Currently, based on the term deposit products listed on Canstar’s database, the maximum term deposit interest rates for a $50,000 deposit are as follows:

Term Maximum rate Inflation Return before tax
30d  2.30% 1.30%  1.00%
60d 2.40% 1.30% 1.10%
90d 2.80% 1.30% 1.50%
180d 3.10% 1.30% 1.80%
270d 3.00% 1.30% 1.70%
1 Year 3.02% 1.30% 1.72%
2 Year 3.20% 1.30% 1.90%
3 Year  3.20% 1.30% 1.90%
4 Year 3.25% 1.30% 1.95%
5 Year  3.20% 1.30% 1.90%

Source: www.canstar.com.au Based on the terms available for the amount of $50,000, products on Canstar’s database at 16/10/16

One note of caution for savers: the interest rate premium being offered to customers who lock into a longer-term term deposit is quite narrow, which indicate expectation of future cash rate reductions.

Share this article