In a recent move that has caught the attention of savers across the country, some of Australia’s largest banks have made significant reductions in the interest rates they offer on term deposits. With the Reserve Bank of Australia (RBA) expected to eventually cut the cash rate, banks are acting preemptively to protect their margins, slashing deposit rates by as much as 80 basis points. While this move may safeguard bank profitability, it also impacts the returns on savings for Australians who have relied on term deposits as a low-risk investment option.

Major Banks Leading the Charge

The Commonwealth Bank of Australia (CBA) was the first to make reductions, cutting term deposit rates across almost all its products by up to 50 basis points on August 14. This came on the same day the bank released its financial results, which highlighted a strong profit performance. Following closely behind, National Australia Bank (NAB) and ANZ made deeper cuts, reducing their rates by up to 80 basis points. These changes have raised concerns among customers who are now seeing their potential earnings from term deposits diminish.

To illustrate, here’s how the major bank term deposit rates have shifted between February 2024 and August 2024:

This table reflects a concerning trend for savers. Each of the major banks has significantly reduced their term deposit rates, with Westpac seeing the steepest drop, falling from 4.90% in February to 4.25% in August.

The Banks’ Rationale

Banks have attributed these moves to a variety of factors, including the current economic environment and expectations that the RBA will lower the official cash rate in the coming months. As the RBA has kept the cash rate steady at 4.35% since November 2023, traders have increasingly priced in an 89% chance of a rate cut by December, though this cut is only expected to be by 25 basis points.

By cutting deposit rates now, banks are protecting themselves against a potential future where they may be locked into paying higher interest on deposits at a time when the cash rate – and thus the rates banks earn from lending – may have fallen. Banks depend on deposits as a relatively low-cost source of funding for their lending activities, and any excessive competition for deposits could lead to narrower profit margins. As Sally Tindall from Canstar noted, “The banks don’t want to be locked in paying interest on term deposits at a rate that is ultimately unprofitable for them.”

Impact on Savers

The impact on savers is clear – less income from their term deposits. For example, a 50-basis point cut in interest rates on a $100,000 term deposit would reduce the depositor's income by $730 over an 11-month period. Given the importance of term deposits for many Australians, particularly retirees, these cuts have stirred frustration. Australians have long relied on the stability of term deposits as a cornerstone of their savings strategy. These recent rate cuts, however, have prompted savers to reconsider their options.

Retirees, in particular, feel the sting. Wayne Strandquist from Australian Independent Retirees highlighted the sentiment among members, expressing concern that banks are reducing rates even before the RBA moves, calling the tactic “a bit sneaky.” There are fears that this strategy may signal even more reductions to come, further eroding the attractiveness of term deposits.

Government Scrutiny

The Albanese government is also keeping a close eye on the banking sector’s actions. The Australian Competition and Consumer Commission (ACCC) last year conducted a review into the deposit pricing policies of major banks. The review concluded that there was a lack of transparency in how banks decided on deposit rates, and the sector was criticised for being slow to pass on interest rate increases to savers, even when such increases were quickly applied to borrowers.

In response to the ACCC’s findings, Treasurer Jim Chalmers announced that the government would take steps to improve transparency in the sector. Banks will now be required to notify customers when interest rates change on their savings accounts and provide better disclosure for all basic deposit products. These actions are intended to protect consumers and ensure that they are informed when the terms of their savings products change.

However, the banks have warned that any pressure from the government to keep deposit rates higher could result in higher mortgage rates as banks seek to maintain profitability.

What’s Next?

As the major banks continue to adjust their term deposit rates, many industry experts expect further cuts as the RBA eventually begins to lower the cash rate. CLSA analyst Ed Henning predicts that banks will continue to “move term deposit rates around as interest rates come down.” This means that savers will need to be vigilant, keeping an eye on their bank’s offerings and being prepared to shop around for better deals.

Additionally, with Australia’s major banks enjoying strong profitability over the last year, there has been increasing scrutiny on their balance between keeping deposit rates attractive and maintaining healthy profit margins. Commonwealth Bank, for instance, reported paying over $20 billion in interest to depositors over the 12 months leading up to June 2024. Nonetheless, banks are cautious, aware of the fine line they walk between keeping customers satisfied and protecting their bottom line.

For those who rely on term deposits as a key part of their savings plan, now may be a good time to reassess options and speak with a financial advisor. There may be other low-risk investment opportunities available that can offer better returns in the current economic climate.