With growing consensus that the Reserve Bank of Australia’s next move will be to lower the cash rate, banks have already begun reducing the interest rates paid to savers on term deposits. Factors influencing term deposit rates include a bank’s appetite for household deposits, the cost of alternative funding sources, competition for new business, and the projected direction of the cash rate over the term. As a result, term deposit rates typically adjust in advance of expected cash rate changes to account for potential official rate movements.

Major banks have quickly responded to these expectations. Recently, the Commonwealth Bank of Australia reduced rates on nearly all of its term deposits for balances under $2 million by up to 50 basis points. NAB followed with similar cuts, while ANZ decreased its 11-month term deposit rate by 0.8 percentage points to 4 percent. In total, 21 deposit-taking institutions have cut 120 term deposit rates over the last two weeks, with many cuts exceeding the 25-basis-point cash rate reduction anticipated by financial markets later this year or early 2025. However, nine providers have also increased rates on 16 term deposits, primarily for terms shorter than one year.

Currently, the highest term deposit rates offered by the big four banks stand at 4.8 percent, varying in duration from eight months with ANZ and NAB, nine months with CBA, and 11 months with Westpac. Nonetheless, these rates are significantly lower than those offered elsewhere in the market; Illawarra Credit Union, for example, is offering 5.3 percent for a six-month term. Meanwhile, longer-term deposits, such as two-year terms, are offering lower rates.

For many retirees, the recent higher rates have been a welcome relief after years of low yields. However, during the current interest rate cycle, term deposit rates peaked last year, with one-year term rates reaching their highest point in July and two- and three-year returns topping out in December 2023. At the start of this year, many fixed rates were cut amid optimism over inflation control and expectations of cash rate cuts. Rates rose slightly around May with renewed concerns over potential rate hikes but have since returned to a trend of cuts.

While term deposits can provide a stable, set-and-forget savings option, especially for those likely to dip into savings, they do come with downsides. Funds are locked away, and early access can incur penalties. Moreover, if the RBA raises the cash rate instead of lowering it, savers could find themselves locked into a lower rate of interest compared to future offerings. The RBA has not ruled out further cash rate hikes, leaving the door open for term deposit rates to increase again, though the current trend suggests they will continue to decline.

An alternative to term deposits is keeping funds in a high-interest savings account, which does not require a fixed term and allows for more flexibility. Since the rates on these accounts do not need to be forward-looking, they are adjusted only when the RBA makes changes, rather than in advance. The highest ongoing savings rate available is currently 5.55 percent from ME Bank, though this rate requires meeting certain monthly conditions. For those seeking simplicity, Australian Unity offers a 5.2 percent rate without conditions.

On the flip side, falling term deposit returns are being mirrored by cuts to mortgage rates. Westpac and CBA recently reduced rates on a range of fixed-rate mortgages for both owner-occupiers and investors, with some rates falling below 6 percent. CBA cut its one- to four-year fixed rate loans by 0.2 to 0.7 percentage points, while Westpac reduced its one- to five-year fixed rates by 0.5 to 0.8 percentage points. NAB also lowered its three-year fixed rate by 0.6 percentage points. ANZ has yet to announce changes, but is likely to adjust its rates to remain competitive.

Smaller lenders are following suit, with several cutting at least one fixed mortgage rate over the past two weeks. Further fixed rate reductions are expected as central banks globally reduce official rates and wholesale funding pressures continue to ease. Additionally, CBA recently cut variable rates for new customers by up to 0.35 percentage points, marking the first such move by a big four bank since April.

For those with a mortgage, the concurrent decline in both term deposit and home loan rates suggests there may be little financial advantage to putting savings into a term deposit or high-interest savings account instead of paying down the mortgage. In many cases, savers may benefit more by applying extra funds to their mortgage, particularly through an offset or redraw facility.