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Written by Matt Kirk Published: May 6 2020 Investments
Banks offer different interest rates to attract funds they can then lend out, and also to satisfy the bank regulator that they are stable.
The lowest rates are paid on everyday transaction accounts because the money is continually coming and going and the bank can’t rely on having it available.
It’s a different situation for investment-style accounts such as term deposits. Investors like term deposits because they are secure with the timeframe and interest known beforehand and, banks offer them for the same reasons. They have the security of knowing they have the funds for a set period and exactly how much interest will be payable and when.
These deposits also enable a bank to satisfy the demands of their regulator, the Australian Prudential Regulation Authority (APRA), that banks have enough liquidity, or funds available, if called on.
At times a bank will offer a higher rate for a particular term to attract this type of investment. Nimble investors who watch rate movements can research to take advantage of these offers, knowing that when the deposit matures they can withdraw their money or find another term and reinvest. It’s a valuable strategy that enables savers to get a great return on their cash in these low-rate times.
Banks know there are a pool of people doing this so when they are looking for funds quickly they can offer a special rate aware they have the options for a quick response.
The simplicity of term deposits works for banks as well as savers and ensures that term deposit rates remain competitive with other savings products. It also encourages banks to continue to offer a wide range of terms and interest rates to attract investors.