Go easy on rates rises, English tells banks

Bill English. Photo / Mark Mitchell

Finance Minister Bill English warned banks yesterday they should not be making hefty profits on interest rate rises when taxpayers are carrying the risk of their business.

But he conceded that he did not know what was behind the latest interest rate rise.

"No one quite understands what's going on there but looking out over the next 12 or 18 months, the taxpayer is picking up a lot of the risk in the banking system and they should be expecting to make lower returns."

Fixed-term mortgage rates have risen in the past few weeks with the five main trading banks lifting fixed rates on five-year mortgages to about 7.5 per cent, mostly from 6.75 per cent.

Reserve Bank Governor Alan Bollard described the rise as unwarranted and said he expected interest rates to remain at "relatively low levels for an extended period".

Mr English said the rise in interest rates and in the Kiwi dollar were unexpected "when we are still in the bottom of a pretty solid recession".

"We are going to have volatility, uncertainty. It is a long road to recovery. We would hope that the dollar and interest rates are not going to make that harder."

The banks would be reacting to the market to some extent.

"I hope they realise, though, that with the taxpayer guaranteeing all the deposits and guaranteeing their borrowing overseas they can't expect to make the same kind of margins they made when they were taking all the risks.

"Now the taxpayer is taking quite a lot of the risk and they [the banks] should be expecting to make lower returns."

Since the financial crisis deepened last September the Government has a scheme to guarantee not only retail deposits of banks but their moves in foreign markets to wholesale funding of banks.

The amount covered by the former is about $125 billion and an estimate of what could be covered under the wholesale funding guarantee was up to $150 billion over several years.

Asked if it was time for Prime Minister John Key to make a personal call again on the heads of banks as he did last year, Mr English said the Government was already in quite close contact with the banking system "because we want to make sure it is stable".

"That is our top priority. I think we should wait and see how events play out. We don't want to jump to conclusions when things are moving around so much."

Commenting on the G20 meeting in London, Mr English said he hoped "a bit of confidence" would come out of the summit.

There were signs the world economy had stopped plummeting and that would be a start.

He reiterated Mr Key's hope that the leaders' meeting on the global economic crisis would not get too carried away with regulation.

"I hope they don't go too far with trying to create a whole lot of regulation for everybody. Our banking system is pretty stable. Our regulatory framework has worked pretty well."

Mr Key wrote to British Prime Minister Gordon Brown and Australian Prime Minister Kevin Rudd setting out his hopes for the summit.

"We are hesitant about the practicality of transnational solutions," Mr Key wrote, "particularly on a global scale. We would look instead for robust national regulation and supervision combined with strengthened co-operative relationships between regulators."

Mr Key also asked Mr Brown to recognise that while the G20 was likely to encourage further fiscal stimulus from countries in the short term, "not every country, even those with low initial public debt [New Zealand] has the capacity to undertake further fiscal stimulus in view of market pressures on access to funding".