Bollard sticks with rate but says banks still have room to cut

Reserve Bank governor Alan Bollard left the official cash rate unchanged at 2.5 per cent yesterday but insists there is room for the banks to cut shorter-term lending rates.

However the banks say the OCR, an overnight rate, is no longer any sort of guide to what they have to pay for the money they lend.

Instead the drivers are "brutal" competition for deposits in New Zealand, rising long-term interest rates abroad and the risk margin banks have to pay overseas investors for the $100 billion or so of imported money they supply.

Since July last year Dr Bollard has cut the OCR aggressively from 8.25 to 2.5 per cent. Over the same period floating mortgage rates have fallen by 4.3 percentage points, so about 75 per cent of the OCR cut has been passed on.

The pass-through has been weaker for longer-term mortgage rates where the expected future track of the OCR is only one influence on lending rates.

Many economists believe Dr Bollard has now done his dash in terms of OCR cuts, unless the emerging signs of stabilisation in the global economy prove to be a false dawn - a possibility he is still wary of.

Much of the benefit of the OCR cuts already made has yet to flow through to borrowers.

About a third of all mortgage debt is due to come up for an interest rate reset over the coming year. If rates stay where they are, borrowers now paying on average about 8 per cent will be moving on to mortgage rates at least a full percentage point lower.

Banks by and large did not cut their mortgage rates after Dr Bollard cut the OCR from 3 to 2.5 per cent six weeks ago, even though that cut was accompanied by an explicit "expectation", repeated yesterday, that he would keep the OCR at or below that level until late next year.

"We went out on a limb," he said. "It should have given them confidence."

The banks needed to weigh their responsibility to their shareholders against their responsibility to the New Zealand economy, he said. "We think some pressure on the banks will pay dividends," he told MPs on the finance and expenditure select committee.

But Bank of New Zealand chief financial officer Ken Christie said the OCR was losing its relevance. Banks were having to pay depositors up to 4.5 per cent - or 2 percentage points over the OCR - for their funds. "It has become a fierce war out there."

The margin between that and the lowest variable mortgage rate BNZ offers is only 1.5 percentage points and non-interest costs it has to cover would eat up half of that.

SEE ALSOThreat from high dollar

- Business Herald, P5