The Deposit War of 2026: How Surging Term Deposit Rates Are Squeezing Australian Bank Net Interest Margins

Term Deposit Rates Break Through 5 Per Cent

Australian banks entered 2026 expecting the familiar playbook: higher cash rates would allow them to reprice loans faster than deposits, delivering a temporary margin tailwind. That playbook is being rewritten by an intensifying competition for household deposits. By May 2026, the average one-year rate on a $10,000 term deposit had climbed to 5.05 per cent, up from 3.70 per cent in June 2025 — a 1.35 percentage point jump in less than twelve months. Some one-year rates pushed close to 5 per cent as early as March 2026, with AMP Go offering 4.95 per cent.

Why Deposit Competition Is Different This Cycle

The RBA’s May 2026 Bulletin acknowledges the pressure. It notes that “some banks have said that stronger competition for deposits has weighed on profitability,” and that deposit balances — particularly term deposits — have become less concentrated among banks, a pattern often correlated with more competitive pressure. The central bank adds that while aggregate spreads between deposit rates and reference rates have shown little evidence of widening, there are signs of increased non-price competition, such as savings accounts that do not require bonus conditions to achieve competitive rates.

The structural problem for margins is that term deposits are priced against BBSW, which is strongly influenced by cash-rate expectations. As the RBA tightened in early 2026, new term deposit rates adjusted broadly in line with the cash rate, while at-call deposit rates adjusted by less. The migration of savers from low-rate at-call accounts into higher-rate term deposits erodes the cheap-funding advantage that banks enjoyed during the pandemic.

The Westpac Margin Signal

Westpac’s 2026 experience illustrates the dynamic. The bank’s net interest margin contracted 7 basis points to 1.87 per cent, and its core NIM fell 5 basis points to 1.82 per cent when excluding treasury operations. Analysts pointed to deposit competition and wholesale funding costs as the twin pressures squeezing the margin outlook, while slower system credit growth limited the volume offset available to lenders. Westpac’s margin performance was not an outlier — it was a signal that the deposit war is imposing a structural cost on the sector.

The Volume Offset Is Disappearing

In previous cycles, banks could offset margin compression by writing more loans. That offset is weakening. The RBA and APRA data point to solid but slowing credit growth, and competition for new mortgage flows is concentrated among a few major lenders. Morgan Stanley’s analysis suggests that while 50 basis points of rate increases could deliver a 2 to 3 basis point temporary lift to net interest margins, the longer-term effect is likely to be more muted as replicating portfolios and equity hedges adjust. When deposit costs rise faster than the funding benefit from higher rates, volume growth becomes a less effective margin defence.

The deposit war is therefore not a temporary flare-up. It is a structural re-rating of the cost of stable funding in Australia — and it is forcing banks to choose between defending margin and defending market share.