Deposit guarantee anchors funds, but for how long?

Media Release
16 March 2009
For Immediate Release

Deposit guarantee anchors funds, but for how long?

CANSTAR CANNEX releases deposit star ratings report today.

The deposit guarantee, introduced by the government in October last year, has effectively levelled the savings playing field to provide a guaranteed safe haven for cash savings at all banks, credit unions and building societies authorised by the Treasury.

Consumers are now free to chase the highest rate for their savings, secure in the knowledge that authorised institutions are government-guaranteed up to a million dollars.

The safety rating of a financial institution is no longer an immediate issue, according to the latest star ratings deposit report released by CANSTAR CANNEX.

“For the purists this flies in the face of fundamental principles of finance which suggest levels of return are directly linked to levels of risk,” CANSTAR CANNEX financial analyst Peter Arnold said.

Less than a quarter of the way through its two-year lifespan, the deposit guarantee has already been called into action to cover the deposits of around 2600 debenture holders in the failed Mascot Finance.

“With only 18 months left to go, many are starting to wonder what will happen to the deposit guarantee,” Mr Arnold said.

“Finance companies with maturity dates after the guarantee ends may find themselves in trouble if the global economy has not stabilised.” “Perhaps a phase-out period or, better still, an extension would be fairer to investors rather than a sudden death cut off of the deposit guarantee,” Mr Arnold said.

CANSTAR CANNEX has researched and rated 80 deposit accounts from 18 institutions to award five stars in the categories of Online Saver, High Saver, Low Saver, High Transactor and Low Transactor.

While low interest rates provide financial relief to borrowers, they are not greeted with the same enthusiasm by savers. Even though deposit rates are down, so is inflation which dictates the real value of interest paid.

The December quarter saw the Consumer Price Index (CPI) fall by 0.5%, the first quarterly fall in two years. Annualised, this brought inflation down to 3.4%, from just over 5% so, although savers are seeing smaller nominal returns on their money, that money is retaining more of its value.
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“Ten percent interest rates on savings are suddenly not so special if eight percent of it is eroded by high inflation,” Mr Arnold said.

Consumers can compare rates and features offered in deposit and transaction accounts by downloading the latest CANSTAR CANNEX deposit account star ratings report on www.canstarcannex.co.nz

ENDS

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