Commonwealth Bank of Australia hits savers with lower deposit rates

No wonder dividend-paying stocks look so attractive

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Commonwealth Bank of Australia (ASX: CBA) has cut the interest rates on a range of term deposits for the second time since August, blaming globally low interest rates and higher funding costs.

CBA has reduced rates on six term deposit products, with periods from three months to five years, by between 5 and 15 basis points.

That's despite Australia's largest bank raising deposit rates in August and claiming that as a win for savers. That came after Australia's big four banks passed on around half of the Reserve Bank of Australia's 0.25% rate cut to mortgage holders.

All four of the big banks also raised term deposit rates at the same time – an unusual step – but perhaps an attempt to pass on the RBA's cut to both savers and mortgage borrowers.

CBA reversed some of those raised deposit rates in September, while Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all followed suit in October.

The cuts may not seem large, but CBA's primary term deposit rates are now below what they were before the bank raised rates in August.

According to CBA, a fall in swap rates is responsible – making wholesale funding more attractive (i.e. cheaper) than deposits.

The problem the banks face in lowering deposit rates is that savers may take their funds out and reinvest the cash in other asset classes where they can get a higher return, like the stock market.

And when you consider that the best term deposit rates available currently pay out around 3.2%, but it means locking your money away for two or more years. No wonder dividend yields of 5% or more are attractive, particularly if they come with franking credits.

Savers with ANZ, NAB and Westpac may soon see their interest rates cut too.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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