In recent years, New Zealand savers have seen some strong deposit competition provide them with relatively high, virtually risk-free, returns as banks moved to meet new regulatory rules requiring them to rely less on short-term offshore funding and more on domestic deposits and longer term offshore funds.
Another factor that led to more competition in the New Zealand deposit market was the rising cost of offshore funding as fears about sovereign risk in European countries began to scare international investors, including those providing funds to New Zealand banks.
However, the landscape has changed quickly and dramatically.
Interest rates are now at historically low levels.
This is due to a drop in wholesale interest rates as a result of ongoing uncertainty in the global economy, driven largely by volatility in Europe.
We are also in a low credit growth environment.
In its May 2012 Financial Stability Report, the Reserve Bank of New Zealand noted that although banks were performing well, competition was set to increase as banks respond to lower credit demand, resulting in downward pressure on bank net interest margins, which are already lower than pre-global financial crisis levels. This in turn will drive down deposit rates, which will affect depositors who rely on the interest returns their investments earn.
At a national level, lower deposit rates could impact on our private savings which have increased through the economic recovery.
This point has been missing from the public discussion on reducing mortgage rates as media have fixated on the hyperbole rather than providing a balanced assessment of the impacts of mortgage rate competition.
The argument that banks should hold the line on deposit rates, at a time when mortgage rates are declining, and operate on lower margins also doesn't hold up that well.
We have a broad scope of banking providers in our market, including some smaller entities who wholly rely on New Zealand deposits for their funding.
It's important to consider the whole market in this discussion.
Banks need to retain a margin between what they pay investors and depositors for funds, and the rates they lend those funds out at.
For banks, net interest margin is not just profit. This is a common misunderstanding.
Banks also pay operating expenses out of their net interest margin. To give a sense of the scale of the banks' operating expenses, in 2011 they totalled almost $4.5 billion.
This is money paid to New Zealand businesses that are suppliers of goods and services to banks, it is money paid in salaries to over 25,000 people who are employed by banks in New Zealand, and it includes sponsorships, contributions to community and voluntary programmes, and financial literacy initiatives. In addition, banks also paid over $1.3 billion in tax in 2011 - this is equivalent to almost the entire New Zealand Police budget that year.
There is no doubt that for borrowers lower interest rates have a significant effect on their ability to repay their loans.
But focusing only on mortgage rates, and discussing them in emotive terms at the expense of a balanced conversation including deposits and the operation of banks in our economy, is neither useful nor intelligent.
Kirk Hope is chief executive of the New Zealand Bankers' Association.
