Pascal Ndege
JF-Expert Member
- Nov 24, 2012
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Fixed deposits (FD) are ideal for investors with a low risk appetite looking for assured returns. Fixed deposits allow investors to deposit their money for a specific period of time for a rate of interest which is typically higher than what is offered for a savings bank account.
Fixed deposit rate cuts
According to experts, under certain macroeconomic conditions such as high inflation, the Reserve Bank of Tanzania (RBOT) adopts a tight monetary policy to regulate the credit available in the country. The RBOT typically hikes the repo rates under such conditions (Repo rates are rates at which the central bank lends to several banks across the country). Consequently, banks raise their fixed deposit rates. Cash Reserve Ratio (portion of bank deposits that commercial banks have to deposit with RBOT) rate cut brings in more liquidity into the system. The CRR cut has a long term impact on the interest rates on deposits. While repo rate and CRR cut largely affects the home loans segment, fixed deposit rates also plummet. Several banks cut interest rates on fixed deposits in select maturity baskets.
There are several factors which influence banks to either decrease or increase fixed deposit rates such as the following:
Smart investors can lock in current interest rates by choosing three and five year fixed deposits prior to banks lowering fixed deposit rates. Individuals in the tax brackets of up to 10.3 and 20.6% can opt for such schemes. Secondly, experts suggest that instead of opting for just one fixed deposit of Tshs 5 millions investors should ideally opt for five fixed deposits of Tshs. 1 million each to make partial withdrawal, during a financial crunch. Investors can also choose five year tax saver fixed deposit schemes, which typically offers around 8.75% to 9% rate of interest.
Zamu ya wenye kimombo chao sasa.
Fixed deposit rate cuts
According to experts, under certain macroeconomic conditions such as high inflation, the Reserve Bank of Tanzania (RBOT) adopts a tight monetary policy to regulate the credit available in the country. The RBOT typically hikes the repo rates under such conditions (Repo rates are rates at which the central bank lends to several banks across the country). Consequently, banks raise their fixed deposit rates. Cash Reserve Ratio (portion of bank deposits that commercial banks have to deposit with RBOT) rate cut brings in more liquidity into the system. The CRR cut has a long term impact on the interest rates on deposits. While repo rate and CRR cut largely affects the home loans segment, fixed deposit rates also plummet. Several banks cut interest rates on fixed deposits in select maturity baskets.
There are several factors which influence banks to either decrease or increase fixed deposit rates such as the following:
- Deposit rates are linked to the rate of inflation. Banks should give positive returns to depositors. Investors should, therefore, monitor the rate of inflation, which affects the lending rates. In many cases, despite depositors getting negative returns owing to high inflation, banks do not raise deposit rates, since that would affect their bottom line.
- Prevailing liquidity scenario in the country. If there is adequate liquidity, banks do not have to focus on retail fixed deposits for their needs as opposed to times of tight liquidity when banks have to turn to their own deposits.
- Demand and supply conditions. If there is less demand for credit, banks, more often than not, decrease fixed deposit rates. On the contrary, if there is high demand for credit, banks increase fixed deposit rates.
- Banks typically cut rates in anticipation of a lending rate cut.
- Falling call rates also signal the amount of liquidity available in the market (banks borrow from the call market for their short-term needs.) If the call market is lending at a lower rate, it in turn, affects interest rates on retail deposits.
- Banks usually cut interest rates when their fund costs plummet. If the rate of fixed deposits is high, a revision of base rates (basis for retail loans) is less likely unless the high-cost deposit rates are cut.
- Banks decrease fixed deposit rates in the near-term during times of muted credit demand affecting loan yields, which in turn, mars their net interest margin (NIM).
Smart investors can lock in current interest rates by choosing three and five year fixed deposits prior to banks lowering fixed deposit rates. Individuals in the tax brackets of up to 10.3 and 20.6% can opt for such schemes. Secondly, experts suggest that instead of opting for just one fixed deposit of Tshs 5 millions investors should ideally opt for five fixed deposits of Tshs. 1 million each to make partial withdrawal, during a financial crunch. Investors can also choose five year tax saver fixed deposit schemes, which typically offers around 8.75% to 9% rate of interest.
Zamu ya wenye kimombo chao sasa.
