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Disappointment - Term Deposits and Falling interest rates

Last week I had a look at the term deposit rates out there and decided to go with bankwest's tddirect which was offering 8.5%. Their interest rate schedule was dated 12th of August. Knowing previously that their rate was 8.7% i thought i should jump in before the september rate cuts and get in a term deposit. I sent the letter on monday (with my confirmation signature etc) and it got setup today. I checked the interest rate schedule again and they changed it! Now dated 20th of Aug at 8.1%!!!

I knew full well they could do this but i didn't expect it since only the week before the interest rates were different! This rate only lasted 8 days. Now i'm locked in for a year at 8.1% (better than other rates out there but still disappointing). So that was my disappointment this week.

On the other note, it is interesting to see that the interest rates on term deposits are falling so fast. What implications will this have on our economy? Is everyone running scared that we will fall into recession? I saw on the foxtel business channel, one economist's speculation that they expect interest rates to be maybe 6% mid next year which is still considered high. Even possibility of it going to 5% (neutral). What are your takes on this? What are the implications and do u think the economist is right?

Tags: deposit, interest, rates, recession, term

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Permalink Reply by JeffK on August 21, 2008 at 5:32pm

I wonder if they waited until rates changed...

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Permalink Reply by Vonny on August 21, 2008 at 6:29pm

actually i suspect that myself. either that or they were seeing how many applications they got with the new rate changes and if it was significant, they'd change the rates before setting up the new term deposits.

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Permalink Reply by Bandwidth on August 21, 2008 at 7:00pm

Interest rates are dropping because the reserve bank has indicated it is going to cut rates and the banks are under pressure to reduce mortgage rates.

I notice how everybody is suspicious of what banks do. Our banking system is the envy of many economies, it is strong and relatively stable.

As I have suggested before what wealthy people do is understand a companies business model and develop strategies to deal with it.

On other pages people are commenting about mortgage rates being too high, well a number of banks have already reduced the long term rates and, guess what, the fixed deposit rates are linked, I would suspect automatically.

Banks work on a fixed margin between the cost of money and the return so when one moves so does the other

I doubt they would change the rates based on the number of applications, it would be more like what the money is returning them.

I would not base any decisions on what one economist said. Remember the media can always find an economist to back up any story.

11 economists in a room will generate at least 12 opinions and 22 speculations.

Australian interest rates were driven up to cool our economy down and maybe we will have a recession, but I believe it will be minor.

As the ones making the comments have not lived through a recession I suspect it feels uncomfortable. Remember us "lucky" "rich" baby boomers have lived through at least one downturn/recession and we are still here.

Well done getting a rate that is better then inflation. If we have a recession prices will go down and your money will be worth more.

A little hint in investment, never be dissapointed with a good deal. Most people fail in the share market by always trying to get a bit more. Now that you have done this deal what is the next opportunity.

If you believe interest rates will be going to 5% then borrow and invest in something that will go up if interest rates go down.

Think what 5% interest rates will do for mortgage stress

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Permalink Reply by JeffK on August 21, 2008 at 10:13pm

I hear you about people being suspicious about banks and bank bashing, but keep in mind that I'm suspicious about everything and everyone! ;)
JFK

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Permalink Reply by Bandwidth on August 21, 2008 at 10:17pm

Not a good way to get wealthy :-)

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Permalink Reply by Matthew Reader on August 26, 2008 at 8:27pm

I reckon it's a great way to get wealthy - too many people are too trusting of other people's opinions and either lose their money because they don't do any of their own research, or get swindled.

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Permalink Reply by Bandwidth on August 26, 2008 at 10:46pm

Suspicion and caution are radically different.

My experience is that most good business people have an element of trust and where necessary do due diligence.

I have seen many suspicous people miss very good opportunities.

Being suspicious can often mask the positive side of an opportunity while focusing on the potential negatives.

Just because a person is trusting does not mean they do not do research and or get swindled.

I have seen a number of inherently suspicious people get "swindled" big time because the swindler handled their suspicions and they became a blind believer. Overcoming suspicion is the standard modus operandi of the spruikers.

Cautious trust has done me very well so far. I have had some pitfalls but have had strategies in place to minimise the impact.

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Permalink Reply by Miffy on August 27, 2008 at 2:46pm

I think you guys are saying exactly the same thing in different ways! You seem to be in agreement, and just arguing over semantics!!

Bandwidth, while I agree that being too suspicious can be a bad thing, but just because you are suspicious, it doesn't mean that you can't trust people - I'm with Matthew, I see too many people trusting the opinions of others without doing any due diligence themselves. A healthy dose of suspicion would do these people some good.

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Permalink Reply by Bandwidth on August 27, 2008 at 4:47pm

Yes I agree it is semantics. When making a wise decision it can often come down to semantics :-)

I fully agree with looking under the covers. It is just that I have found that words and phrases with negative implications can become limiting factors

Caution :-Careful forethought to avoid danger or harm,
Close attention or vigilance to minimize risk

Suspicion :- The act of suspecting something, especially something wrong, on little evidence or without proof.

I believe it will do people better to have a healthy dose of caution as opposed to the same in suspicion.

A suspicious person will often freeze in a position of uncertainty, while a cautious person will proceed with caution. Becoming wealthy is about proceeding :-)

It is the negative tone of suspicion that often prevents people from taking calculated risk

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Permalink Reply by Vonny on August 22, 2008 at 3:35pm

Thanks for your reply Bandwidth.
I knew that the reserve bank was dropping rates so I expected the fall in rates - hence why I wanted to lock in a high rate term deposit. I just didn't expect a change in rate pretty much the day that my application was to go through because the last change was less than 2 weeks ago. My disappointment was more a case of not meeting expectation rather than not locking in a rate. 8.1% is pretty good anyway so I'm happy with that. I'll keep in mind your advice about mindset when share investing since I'm not too successful at that right now. That's one area I am hoping to improve in.

Regarding suspicion about banks. I am not suspicious enough! I believe that every possibility should be considered and it's those suspicious people out there (like JeffK!) that help me see the downsides to what I would like to do. It's not necessarily the number of applications but I believe they COULD have a $ limit that is invested before they decide to lower the rate. Due to the delay in online application and processing, they can change the interest rate when they reach $X to mature on a certain date. Not necessarily a conspiracy but could be a business practice.

I don't base my decisions on an economist either but consensus between a group of economists tends to reflect the market. Currently the consensus seems to be that there definitely will be a rate cut next month and it's more a case of how much. Personally, I speculated that there would be a 25 basis point cut and another 25 basis point the month after but with the banks cutting term deposit rates so aggressively, it tends to point to a 50 basis point cut. Seems like the economists (SFX) are leaning towards a 50 basis point cut too:
"NAB would only commit to passing on a rate cut of up to 25 basis points if the Reserve cuts by 50 basis points - and the Sydney Futures Exchange said there was a 61 per cent chance it would" (http://www.news.com.au/business/money/story/0,25479,24219979-501610...)

I am pretty comfortable with a recession if it was to happen. Mainly because it fits into my timeline. I am hoping to buy a home in two years or so, so a recession will help me in that regard. For my next opportunity, I was going to lock into another term deposit when one of mine matures next month but I will have to see how the interest rates are first. I am being conservative right now since I will need money in two years and being conservative isn't so bad in the current environment. If I wasn't, I would probably put some money in the stock market a few months down the track. Also, I haven't got to property investing yet, maybe after I buy my own primary residence :)

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Permalink Reply by Bandwidth on August 22, 2008 at 5:17pm

Hello Vonny

You certainly sound well focused and well read, that is a long way towards growing your wealth. I wish I had the same mindset when I was about your age :-)

A good read on trading discipline is mentioned in my blog http://www.moneyconfessions.com.au/profiles/blog/show?id=2081871%3A... I think if not come back to me

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Permalink Reply by Edward on August 25, 2008 at 12:59pm

Don't blame banks. Quick responds to changed markets is critical for small banks' success, just like what you were trying to do: find a good saving plan before rates cut.

Falling interest rates is not a sign of recession. A relatively high interest rate would stifle business activities, given inflation already under control.