Banks Resist Raising Term Deposit Rates Amid Margin Compression

The Reserve Bank of New Zealand wants banks to incentivize retail deposit growth by raising term deposit rates. However, most banks are not complying, and term deposit rates have remained largely unchanged despite a recent Official Cash Rate increase.

Kiwibank was one exception, increasing its six-month and one-year term deposit rates by 5 basis points on Monday. But these increases were small compared to the full 25 basis point rise in savings account rates.

According to the Reserve Bank's data, bank deposits currently represent more than 70% of all bank funding. Since the pandemic, this figure has remained steady, with banks relying less on retail deposits and more on wholesale bond market financing.

ANZ is an outlier in its use of derivatives in its funding strategies, but for most banks, raising term deposit rates would not make sense given their ability to raise additional funding through wholesale markets.