For many Australians, a term deposit is one of the first investment products they encounter. It is straightforward, relatively low risk and offers the certainty of a guaranteed interest rate for an agreed period.

Despite their popularity, many people are surprised to learn that term deposit rates are not set by the Reserve Bank of Australia. Instead, they are determined by individual banks competing for customers' savings.

Understanding how the market works can help savers make better financial decisions.

What is a term deposit?

A term deposit is an investment offered by banks and other authorised deposit-taking institutions (ADIs).

You agree to deposit a sum of money for a fixed period—commonly three months, six months, one year or longer. In return, the institution agrees to pay a fixed rate of interest for the life of the investment.

Unlike an everyday savings account, the interest rate generally does not change during the agreed term, giving investors certainty about their return.

Who decides the interest rate?

Many Australians assume the Reserve Bank sets term deposit rates.

It does not.

The Reserve Bank sets the official cash rate, which influences borrowing costs throughout the financial system. Individual banks then decide what interest they are prepared to offer depositors.

Those decisions depend on several factors, including:

• the bank's need to attract customer deposits
• competition from other financial institutions
• broader market interest rates
• alternative sources of funding
• the bank's lending strategy and liquidity requirements.

As a result, two banks may offer noticeably different rates for exactly the same investment period.

Why do rates change?

Term deposit rates rise and fall as economic conditions change.

When banks want to attract more customer deposits, they may increase rates to become more competitive. If funding is readily available from other sources, they may reduce the rates they offer.

Changes in the Reserve Bank's cash rate often influence this process, but they are only one factor among many.

This is why some banks adjust their rates immediately after an official interest rate decision, while others move more gradually or not at all.

The advantages

Term deposits continue to appeal to Australians who value certainty.

Some of their key benefits include:

• a guaranteed interest rate for the agreed term
• protection from daily market fluctuations
• predictable returns for budgeting purposes
• suitability for conservative investors and retirees
• simplicity, with no specialist investment knowledge required.

Deposits held with authorised institutions may also be covered by the Australian Government's Financial Claims Scheme, subject to eligibility requirements and applicable limits.

The disadvantages

Like every financial product, term deposits have limitations.

Money is generally committed for the agreed period, and early withdrawal may result in reduced interest or other conditions depending on the institution.

Another consideration is inflation. If prices rise faster than the interest earned, the purchasing power of savings may decline over time.

There is also an opportunity cost. Shares, property or other investments may produce higher returns over the long term, although they also involve greater risk.

Should you compare rates?

Absolutely.

Many Australians automatically renew a term deposit with their existing bank without checking the market.

However, interest rates can vary significantly between financial institutions, even for identical investment periods.

Taking the time to compare available offers may improve returns without increasing investment risk.

Who are term deposits best suited to?

Term deposits are often well suited to:

• retirees seeking stable income
• people saving for a home deposit
• investors wanting to balance higher-risk investments
• anyone who values certainty over potentially higher returns.

They are not designed to deliver the highest possible investment return. Their primary purpose is to provide security and predictability.

Looking ahead

Interest rates will continue to rise and fall as Australia's economy changes.

For savers, the important lesson is that term deposits are part of a competitive market. Banks compete for deposits, and that competition can work to the advantage of informed customers who are prepared to compare products before investing.

The Times View

Term deposits remain one of Australia's most accessible investment options because they combine simplicity with certainty. While they may not always produce the highest returns, they continue to play an important role for Australians seeking capital security and predictable income. Understanding how banks set their rates—and remembering to compare offers rather than accepting the first available product—can make a meaningful difference to long-term savings.