Get ready for higher returns

Banks have announced they will raise term deposit interest rates after the Reserve Bank of Australia’s (RBA) decision to cut rates this week.

The RBA’s decision was no surprise, but the reaction of the major banks was unexpected and, for once, that was good news for savers.

When the RBA decided to lop 25 basis points off the benchmark cash rate, it was assumed the banks would follow by cutting rates to borrowers by the same amount.

They didn’t. Major banks passed on about half of the rate cut, around 10 to 14 basis points. They said they would reward savers by increasing interest rates for term deposits.

Westpac immediately announced that its rate on a one-year term deposit (TD) would rise by 0.55% to 3% a year, a two-year TD would jump by 0.45% to 3.10% and a three-year TD by 0.55% to 3.20%.

National Australia Bank announced a “blackboard special” of 2.90% on an eight-month TD, having increased the interest rate by 0.85%.

The decision not to pass on the full rate cut to borrowers earned banks a “please explain” from Prime Minister Malcolm Turnbull, but bankers said they had to balance the interests of borrowers with their own need to raise funds.

NAB Chief Operating Officer Antony Cahill said the bank’s own funding costs had been rising.

The RBA’s rate decisions are usually only reported in terms of the impact on borrowers, which ignores the consequences for people who rely on interest income from their bank deposits.

Bankers’ decisions to give savers something from the latest rate cut passes on some of the benefit to people who are prepared to let the bank use their money for a set term.

Bankers will gain certainty from having funds available and savers will get not only better interest rates but also a wider range of competitive offers as banks react to the announcement over coming days.

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