The Reserve Bank of New Zealand (RBNZ) has begun cutting interest rates since August, which will provide relief to borrowers, but savers wonder how it will affect their Term Deposits. At CP Wealth, we believe that interest rates will steadily decrease over the next year, but savers will still have opportunities to capture returns. We share some of our thoughts on research and trends.
The Cost-of-Living Crisis and Inflation Control
Most of us have felt the effects of the cost-of-living crisis, as inflation rates have persistently stayed high. The measures taken by the RBNZ have successfully pulled back inflation to the midpoint of 2.2%. In their August Monetary Policy Statement, the RBNZ forecasted that the OCR would fall from 5.5% to 3.0% over the next two years. We have already seen a 75-basis point drop since August, and economists predict we will begin to see steady cuts from November to 2025. This is welcome news for borrowers but may leave savers wondering what that means.
Keep Calm and Carry On
Savers who manage their term deposits will notice lower rates than last year. 12-month term deposits range between 4.80% and 5.0% across the four big banks, compared to 6% a year ago. As rates continue to fall over the next year, it is essential to keep calm and carry on. We believe there is still some time before rates hit their low, but it is good to know what alternatives you can turn to when they do.
Alternatives to Term Deposits
At CP Wealth, we have a wide range of investment options that work similarly to term deposits, which our team has hand-picked for their quality, cost, return, and tax efficiency. Here are a few of the different options available.
Cash funds are actively managed investment schemes that provide investors an alternative to term deposits. There are several benefits:
- They are more flexible: withdraw funds without penalty, usually within 3 days.
- Invest in short-term bonds and term deposits that tend to have long duration, so they may still be riding on the waves of past interest rates.
- Will generally pay distributions quarterly.
- Tax efficiency: As PIE funds, the maximum tax rate is 28%, which benefits any investor with a higher marginal tax rate. Unlike Term Deposits where you are taxed accordingly.
We also like to point out how they differ from term deposits:
- Fees: Funds are actively managed, and a fund manager fee is charged.
- They could fluctuate. Unlike term deposits, where you have a fixed return on maturity, cash funds can go up and down in the market.
Fixed-interest funds are similar to cash funds but predominantly invest in corporate and government bonds. They are actively managed and may charge slightly higher fees than a cash fund. This is because the investments are slightly higher in risk, which may also lead to a higher return than a cash fund.
If Term Deposits are where you feel comfortable, we offer wholesale Term Deposit rates across a range of banks that can sit next to your investment portfolio.
Infrastructure funds can protect against periods of high inflation, like what we are currently experiencing. These funds comprise operating assets from the transport, utilities, energy and communications sectors. The assets held by these companies typically offer high barriers to entry, pricing power, and structural growth and can generate stable, long-term cash flows that tend to be less affected by the ups and downs in the market.
Talk to an expert
We deeply understand how the markets work, and there is no need to panic when you hear news of interest rate cuts. We are here to help you make the right financial decision. Talk to your financial adviser about the best investment solution for you.
27 October 2024
By Jenaia Clarke, Operations Director and Financial Adviser
CP Wealth
