Banks slapped over stalled rate cuts

Cartoon / Rod Emmerson

The Reserve Bank says it is "disappointed" banks have not passed on more of its big rate cut earlier this month to home buyers and believes some interest margins banks are earning on mortgages are "unusually elevated" at present.

In its twice-yearly Financial Stability Report released yesterday, the RBNZ noted bank interest margins - the difference between what banks pay for funding and what they earn on loans - were on the rise.

A small rise in the final quarter of last year was followed by further increases in the spread between banks' funding costs and lending rates evident in the most recent data, although this was not an entirely reliable indicator of net interest margins.

Nevertheless the RBNZ said margins on some lending, such as floating rate mortgages, had been "unusually elevated at times" and RBNZ Deputy Governor Grant Spencer yesterday confirmed now was one of those times.

"We do see a considerably higher margin on floating mortgages than most fixed rate mortgages," he said at a media briefing. "In our view there's scope for more competition in the floating rate mortgage segment. Those margins really have been as high as I can ever recall," said Mr Spencer, whose career includes nine years in key roles at ANZ Bank.

While New Zealand home buyers still overwhelmingly favour fixed rate term mortgages, variable or floating rate loans have increased in popularity as short-term rates respond to a string of deep official interest rate cuts. March data shows just over a third by number of all residential mortgages are now on variable rates against just over a quarter a year earlier.

Although both RBNZ Governor Alan Bollard and Finance Minister Bill English have in recent weeks said they expect more benefit from OCR cuts to be passed on to borrowers, there is little to suggest that is happening.

Last month's 50 basis point cut to the OCR had some impact, with two of the major banks reducing fixed rates, "but it's probably fair to say that we have been disappointed with the response to date", said Mr Spencer.

He acknowledged the relationship between the OCR and retail rates was not precise, there were other factors affecting mortgage rates, and further retail rate reductions were possible "as some of those other conditions in the markets change".