Savers told to keep rate rises in mind

Ed Logue
August 16, 2009

Savers contemplating locking their money in a term deposit should first consider that interest rates are likely to rise over the next year, a financial analyst says.

A senior analyst with financial research firm Canstar Cannex, Harry Senlitonga, said investors needed to anticipate higher rates for their savings were likely over the next two years.

"In a situation where there is an upward trend on interest rates, the big question is how far will interest rates go up and is it worth locking the rate for a term deposit over that period," Mr Senlitonga said.

The debt futures market expects the Reserve Bank of Australia (RBA) to lift the cash rate by a quarter of a percentage point in November, from its current 49-year low of three per cent.

As the economy recovers, financial markets forecast the cash rate to reach 4.5 per cent by July 2010.

RBA governor Glenn Stevens said last Friday that a more "normal" setting for the overnight cash rate was higher than the current three per cent.

"It is pretty clear `normal' is more north than where the cash rate is now," Mr Stevens told the House of Representatives economics committee meeting in Sydney.

"For the past 17-18 years, in the low inflation world since the early 1990s, the average cash rate is in the fives (per cent)."

Mr Stevens also said anyone taking on a new mortgage should allow for at least a two percentage point increase in interest rates.

Mr Senlitonga said many events may happen in the next five years and if the key consideration was to have a decent stream of income, then locking money for longer periods was better because of its higher interest rates.

He said that as an example, the Commonwealth Bank-owned BankWest offered seven per cent for a $10,000 term deposit over five years compared to 4.16 per cent for a six months term.

"Some people just want to put the money in a term deposit because of the security and a steady stream of income."

But locking funds for a long term was not very popular among savers, Mr Senlitonga said.

"Only a small percentage of people lock in for this period," he said.

"Things may change, such as your financial circumstances.