Kiwis are developing a savings habit, but may need to consider the possibility of interest rate cuts next year.

Many investors, wary of sharemarket volatility and unwilling to take on debt to invest in property, have opted for a flight to safety and simple deposit accounts. Total household bank deposits have grown at more than nine per cent a year for the past two years.

According to the Reserve Bank, household bank deposits grew from $92.1 billion in July 2010, to $100.5b in July 2011, to $109.8b in July this year.

Most of that money is being held on call or in short-term accounts.

Total funding figures show that 36 per cent of the money in banks was on call, 35.5 per cent was repayable within 30 days and 92.1 per cent would be repayable in less than a year.

The figures also show that most of the increase in bank funding over the past two years has been at the shorter term end of the market.

Investors might have many reasons for wanting to keep their money accessible, but an obvious incentive is the relatively low interest rate premiums which apply on longer-dated term deposits.

For example, two of the best short-term rates on offer at the moment are TSB's PIE cash fund which is offering an equivalent 4.08 per cent (for investors taxed at 33 per cent) with the money available on call, and Kiwibank's PIE Notice Saver, which offers interest equivalent to 4.7 per cent for withdrawals on three months' notice and 4.48 per cent on 32 days notice (source interest.co.nz).

The best of the main bank's long-term deposit rates are BNZ's five-year PIE term deposit at 5.83 per cent (assuming a 33 per cent tax rate) and Westpac's three-year PIE fund which offers an equivalent rate of 5.19 per cent.

Many investors are probably deciding that the extra interest margins available for locking up their money for several years probably aren't worth it, and are keeping their money within easy reach on short-term deposits.

However, they should consider changing that strategy.

Last week the Reserve Bank left the official cash rate unchanged at 2.5 per cent and now does not expect rates to start rising until the end of next year.

However, as fund managers Harbour Asset Management said in a commentary on the Reserve Bank's latest announcement, it implied that incoming governor Graeme Wheeler "will be greeted with a forecast that he will do nothing for a year".

But keeping interest rates low will not address the problem of the high New Zealand dollar, which is already strangling the export sector and is likely to face further upward pressure as central banks in the US and Europe prepare to crank up their money printing presses in yet another desperate attempt to try to stimulate their economies.

"If the NZ dollar continues to strengthen (particularly in the face of loose monetary policy overseas devaluing foreign currencies), they [the Reserve Bank] will be faced with some tough choices," Harbour said.

"It is not our central view that the RBNZ will have to cut interest rates from here. But in an uncertain world it has become a plausible scenario to consider."

This means that investors who want to stay with fixed interest should at least consider the possibility of moving some of their money into longer-term investments.

As meagre as their returns may seem now, they could be better than what is on offer in 12 months' time if interest rates fall.

Those investors who aren't confident dealing with market fluctuations themselves could consider investing in fixed-interest managed funds.

These will often invest in higher yielding corporate bonds.

For example, Harbour Asset Management's Corporate Bond Fund, which invests in NZ-based or listed bonds as well as government and local authority securities, achieved a gross return of 6.69 per cent (before tax and fees) in the year to August 31.

That return is likely to fall back closer to the fund's underlying yield of about 4.59 per cent in the coming year.

However, if bank deposit rates do fall, getting 4.59 per cent on your money may seem like a good deal this time next year.

- © Fairfax NZ News