Will savers be stung more than borrowers benefit from falling interest rates?

Banks were quick to announce cuts to their floating mortgage rates on Wednesday afternoon, as the Reserve Bank (RBNZ) cut the Official Cash Rate (OCR) by 50 basis points to 4.75%.

They fired off pre-prepared statements moments after the RBNZ made its announcement, saying they’d likewise slash their floating mortgage rates by 50 points.

While the central bank’s decision to opt for a 50, rather than 25-point cut, is welcome news for borrowers and those worried about the sluggish economy, savers and those keeping an eye on bank profitability might be wary.

Banking experts, including former RBNZ deputy governor Grant Spencer and Massey University associate professor Claire Matthews, note changes of direction in monetary policy can create opportunities for banks to line their pockets.

With the OCR on the move south, there’s potential for banks to receive relatively more interest from borrowers than they pay savers.

Indeed, this started happening in August, when the RBNZ made its first OCR cut in this easing cycle, according to the latest available RBNZ data.

The average interest rate banks collectively received on the stock of all the home loans they had on issue continued to rise during the month to 6.37%.

However, the average interest rate banks paid for all their deposits fell to 4.34% - 3.66% for call accounts and 5.84% for term deposits.

So, banks continued to receive higher rates of interest from borrowers in August, but started paying savers less – overall.

Spencer and Matthews acknowledged the RBNZ changing tack, from tightening to easing monetary conditions, created opportunities for banks to profiteer. But they cautioned against drawing firm conclusions from August figures at this point.

Both acknowledged borrowers tend to fix their mortgages for longer durations than savers tend to fix their deposits for.

While someone taking out a mortgage now would be charged a lower interest rate than they would have six months ago, there are still borrowers, who fixed a few years ago, rolling onto higher rates than they were on.

This situation would have contributed to banks continuing to receive higher interest payments (proportionately) in August.

Spencer believed the trend up could continue for some months.

On the deposit side, however, the rollercoaster may have peaked.

Because fewer savers put their money in term deposits for longer durations, interest rate changes are passed through to savers more quickly.

Matthews noted that because of all these moving parts, it would be difficult for banks to line up both sides of the ledger – or for the changes in interest they pay to align exactly with the changes in interest they receive.

She also said banks might still be managing their finances cautiously, given the recessionary environment and expected rise in unemployment.

While borrowers are coming through this high interest rate period relatively well, it can take some time for economic stress to be felt by banks.

For example, it wasn’t until a few years after the 2008 Global Financial Crisis that there was a real rise in the number of loan defaults.

Nonetheless, Matthews believed it was reasonable to keep an eye on banks’ net interest incomes.

Indeed, differences between what banks pay for funding (from depositors as well as wholesale markets) and what they receive for lending affect their profitability – specifically, their net interest margins.

Their profitability has been in the spotlight lately, with both the Commerce Commission and Parliament’s Finance and Expenditure Committee doing studies on competition in the sector.

Banks’ net interest margins rose to 2.35% in the June quarter. In the June quarter of last year, it hit 2.38% - the highest level in 17 years.

At the time, banks partially attributed their high profits to the rapidly changing interest environment – aggressive OCR hikes.

Even though banks hiked their term deposit rates with their mortgage rates, it took time for savers to shift their money from call accounts to term deposits that paid higher rates of interest.

The public will have more insight on how banks are currently balancing the interest they pay versus the interest they receive, when the RBNZ releases data for September on November 7.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.