What does it mean for term deposits and savings?
As anyone living off a lump sum of savings knows, over the last year term deposit and savings rates have been super low. In fact, they’ve been the lowest we have on our records going back to the 1960s.
But 2021 has been a turning point. Term deposit rates have started to increase, at last. The five-year term deposit rate has more than doubled, from 1% to over 2% (at the time of writing). But while any increase in interest rates is good news for savers, the rates for term deposits and savings accounts are still lower than what most people think of as “normal”, and we expect rates to remain low when compared to the average levels over the past 10-15 years.
One of the biggest challenges for people is the inflation rate. We expect inflation will be much higher over the next five years than it has been over the past five years. Inflation is now back above 3%, and we expect it to press higher over late 2021/early 2022.
That means it’s decreasing the value of your money faster than the interest rate is growing it in a term deposit.
If that continues to be the case, the higher expected returns of managed funds and other investments will continue to be more attractive to savers.