For the first time in some while, longer term fixed deposits are offering higher interest rates than overnight cash investments.

This situation is bringing the spark back to long-term fixed deposit investments, resulting in many people choosing this kind of investment to benefit from higher returns in a financially tight economic environment.

Currently, the overnight rates on money market accounts have fallen below the 12 month fixed deposit rates.

Lower interest rates put a strain on people living off interest income. However, longer term cash investments offer an opportunity for interest rate sensitive investors to lock in higher interest rates.

Is the time right to invest for longer terms to maximise interest rates?

Interest rates have dropped significantly since the South African Reserve Bank (SARB) started to cut rates in December 2008. The SARB has already cut interest rates by 3.5 percent since the start of this downward cycle. The money market is currently discounting another one percent rate cut at the 28 May Monitory Policy Committee (MPC) meeting.

"If the market’s prediction of a further rate cut at this week’s MPC meeting is correct," says Robert Keip, Head of Savings and Investments at FNB, "investors may well end up earning up to 1.85 percent less on their money market accounts compared to the current returns on a 12 month fixed deposit. Rate sensitive investors may want to protect their income by diversifying into longer term fixed deposits and by so doing take full advantage of the current higher returns."

Although it is not a given that the SARB will cut interest rates at each and every MPC meeting, it should be noted that the SARB has scheduled monthly MPC meetings except for July.

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