Why does the interest rate banks pay on your deposits vary over time? There are actually several factors involved. Banks make money from two basic sources: service fees, and interest on loans. Of course, the interest the bank charges for loans has to be higher than the interest the bank pays on deposits, and so the interest rate the bank pays on deposits is influenced by how much the market will bear for loans.

The biggest factor in setting the interest rate is the actions of the Reserve Bank of Australia (RBA). Although the RBA does not dictate the specific rate that banks can pay, it does influence that rate. Although each bank may offer different rates, both on deposits and loans, those rates will be based on the fiscal policy of the RBA.

When considering a high interest account, especially one that will lock your money in for a long period of time, it makes sense to pay close attention to the RBA's actions. The RBA meets once a month to examine the state of Australia's economy in detail. This agency may then decide to influence the economy by making changes to the official cash rate, or the cost of money that financial institutions pay. When the economy is weak, the RBA may lower the rate in order to stimulate economic activity. The lowered RBA rate filters out into all bank interest rates, and then interest rates get lower in general. During weak economic times, it may be disadvantageous to put money into long-term deposits, because interest will be lower. However, during those same weak economic times, it may be advantageous to make a major purchase on credit, because the cost of credit will be less.

During a strong economy, on the other hand, the RBA may decide to increase the rate to avoid runaway inflation. When the RBA does this, interest rates get higher, and it is a good time to put money into long-term high interest accounts (but a less advantageous time to borrow money for major purchases).

Outside of the actions of the RBA, individual banks' interest rates will also vary, depending on countless other factors, including the size and strength of the bank, and even location. You may, for example, get a quarter percent more from a bank in Sydney than you would from a bank in Hobart. That's why it pays to look around when shopping for a high interest savings account – and to look outside your own neighbourhood for the best rate.