Early treat must be enough for banks

By Brian Fallow

Between the lines


The banks, which opened their Christmas presents early by raising floating mortgage rates last month, are not entitled to another lot. Not this millennium.

The flurry of mortgage-rate rises by all the majors except the National Bank was excused on the grounds that 90-day bank bill yields had risen to 5.1 per cent, as the markets anticipated the rise in official cash rate which Reserve Bank Governor Don Brash delivered yesterday.

That had squeezed their margins to a degree they could no longer bear, they said.

Since then 90-day bill rates have risen about another quarter of a percentage point, as the markets anticipated that Dr Brash would project a more aggressive monetary tightening track over the next couple of years - as he has.

So isn't another mortgage rate rise justified?

Bankers will certainly look without joy upon the present 1.4 percentage-point spread between 90-day bill yields (around 5.35 per cent) and floating mortgage rates (6.75 per cent). For most of this year the gap has been around 1.75 points.

And the Reserve Bank expects 90-day bill rates to average 5.8 per cent in the first half of next year, which suggests a further 0.5 of a percentage point rise in the Reserve Bank's official cash rate in March.

All of this undoubtedly represents increased pressure on retail lending rates. That is the point of the exercise, after all, as a way to curb inflation.

When Dr Brash was asked yesterday if he was nudging banks to raise mortgage rates, he replied disingenuously: "I am not nudging them at all. If they want to adjust their retail rates that is entirely their affair."

But there is a case for the banks to absorb that pressure for a few months at least. Banks have to be profitable, but the spread between 90-day bills and floating mortgage rates is less important to banks' bottom line than it was.

In recent years their profits have become less reliant on net interest income and more reliant on other income such as fees and charges.

Mortgage lending is only a minority of their lending, and floating-rate loans only a minority of their mortgage book.

And wholesale 90-day money is not their only source of funds for variable-rate mortgages. There are also retail deposits. Through the first half of this year the spread between floating mortgage rates and six-month deposits was around 2.25 percentage points.

In the end, though, pleas and exhortations to the banks are likely to fall on deaf ears.

Competition is a more reliable influence and for banks, as for other businesses competitors, is less of a constraint when business is good. Judging from the credit growth data, business for bankers is not at all bad.