A major bank's move to nearly double its long-term deposit interest rates shows the economy is on the mend, according to a prominent economist.
ASB on Monday bumped its five-year term deposit rate to 1.75 percent, up from below 1 percent. Smaller increases were made to its shorter term deposit rates, including 1.5 percent for four-year deposits (up from 1 percent).
The bank cited "the performance of the New Zealand economy through COVID-19 [being] stronger than anyone anticipated".
Economist Cameron Bagrie told The AM Show on Tuesday it was part of the bank's strategy to take advantage of what's become known as the 'reflation trade'.
"That's just a fancy name for saying things are looking a little bit better out there. When things look a little bit better out there, interest rates move up - what we're starting to see with ASB is a first shot across the bow, in regards to moving those term deposit rates up."
Low interest rates have seen huge amounts of borrowing being poured into property, with many economists blaming that for the double-digit percentage increase in house prices in 2020, despite the economic woes.
"Banks are lending an awful lot of money in regard to the housing market, so if there's more money going out the door you need more money coming in the door on the other side," said Bagrie.
But investors will need to consider whether 1.75 percent - despite being a vast improvement - is still worth it.
"If we get inflation back up towards 2 percent, which is what the Reserve Bank is mandated to do, then your real return is effectively going to be flat - in fact, slightly negative," said Bagrie, calling the new rates "still unattractive".
"But it's slightly better than the number that was floating around three to four months ago, when the entire term deposit curve was sub 1-percent. So things are moving a little bit more in the direction of the depositors."
The other major banks' five-year deposit rates are all still sitting on 0.9 percent. The only bank offering close to ASB's rate, according to financial news site interest.co.nz, is China Construction Bank (1.3 percent) and the Indian Bank of Baroda (1.25 percent).
