Lending war worry for Bollard

The Reserve Bank will be eyeing the latest round of mortgage rate competition between the major banks with concern for its potential to reignite the housing market and generate fresh inflationary pressure, economists say.

With as much as $15 billion worth of two-year fixed rate mortgages written at the height of the 2004-2005 "mortgage war" now maturing and up for renegotiation, the major banks have again plunged into a high-stakes Dutch auction on rates in a bid to poach business from each other.

ASB Bank kicked off the latest skirmish, in recent weeks cutting its two-year fixed rate from 8.1 per cent to 7.99 per cent. BNZ has responded by trimming its two-year rate to 7.95 per cent, down from 7.99 per cent.

One major bank insider who did not wish to be identified said: "Personally I think the RBNZ will be looking at the play the banks are making right now and will be quite concerned. That drives the risk of an official cash rate [OCR] lift in either October or December."

The Reserve Bank put the possibility of another official cash rate hike back on the table last month.

Economists suspected that was a tactical move, aimed at keeping interest rates high until the bulge in fixed-rate mortgages was out of the way.

"At this juncture of the economic cycle the Reserve Bank does not want to see the housing market get a third wind," said ANZ head of market economics Cameron Bagrie.

"They are naturally going to interpret the recent round of mortgage rate cuts pretty conservatively. It will be raising their eyebrows."

Bagrie said the first round of the mortgage war in late 2004 and early 2005 had provided the housing market with a second wind.

"We had the falls in fixed lending rates and lo and behold the housing market was off to the races again," he said.

Westpac economist Doug Steel said the latest cuts in lending rates "are certainly something that is concerning the RBNZ by taking a little bit of the sting out of their desired policy tightness".

However, he said the ferocity of the rate competition between the banks and therefore its impact on the market were likely to be constrained by the much narrower margins banks were earning on money they lent to homebuyers.

"In contrast to a couple of years ago when the war was starting, margins are already squeezed and therefore can't be squeezed further as much as they were back then.

"So the RBNZ may have less to fear than they would if the margins were a little wider.

"Having said that, monetary policy is on a knife edge at the moment with inflation still up at 4 per cent and the RBNZ concerned that inflation expectations are creeping upwards and may embed inflation at a higher rate.

"They are pretty aware of that and keen not to let it happen."

ANZ's Bagrie said recent currency movements were working in the RBNZ's favour by dampening inflation. "In a perfect world, they'd prefer interest rate settings to be doing it," he said.

The bank had also been given some breathing space over the next two to three months by lower petrol prices.

"Do they decide to deliver additional bitter medicine at this juncture? I still think it's a little bit of a stretch."

While he did not see the same risk of the housing market reacting strongly to the latest round of cuts, "balancing that, the Reserve Bank's got even less inflation headroom.

"They just don't have any tolerance for taking that risk on board so they are going to be looking at the recent round of lower fixed mortgage rates and it will certainly be a discussion point."


Rates

Two-year fixed-rate mortgages
ANZ-National:8.10pc
ASB: 7.99pc
BNZ: 7.95pc
Westpac: 7.99pc
Kiwibank: 7.95pc