Reserve Bank keeps up mortgage rate pressure on banks

Alan Bollard / Photo Mark Mitchell

The Reserve Bank has again raised concerns at the level of interest banks are charging on floating rate mortgages.

In an analysis of interest rate margins made public today, the Reserve Bank said the pricing of floating rate mortgages appeared "unusually" high in recent months.

"... we believe there is some scope for further reductions in these rates without compromising the viability of this lending."

The analysis echoes comments coming out of the Reserve Bank in recent months.

It comes at a time when banks are the target of loud dissatisfaction about interest rates.

In a select committee report last month, MPs lashed out at banks for failing to reduce mortgage rates, for protecting their profits, and, in the case of Australian institutions, for treating New Zealand firms differently.

But the Reserve Bank did say in today's analysis that, on fixed rate lending, it believed the banks' pricing was reasonable given the underlying cost of funds and taking into account the margins typically earned on those products over time.

Reserve Bank Governor Alan Bollard said the analysis had been released to respond to questions the Reserve Bank had received about its stance on what room remained for interest rate cuts.

The Reserve Bank was continuing to talk to the banks to clarify recent trends in their funding costs and margins. Those matters would be reviewed further in the Reserve Bank's November financial stability report.

As financial turmoil gripped the world, the Reserve Bank rapidly cut the official cash rate (OCR), dropping it from 8.25 per cent last July to 2.5 per cent at the last reduction at the end of April.

A large part of the OCR cuts had been passed on to household and business borrowing rates, reflecting the soundness of New Zealand banks, the Reserve Bank analysis said.

That was in contrast to the experience in many other countries during the global financial crisis.

Marginal funding costs for banks had increased relative to the OCR, reflecting increased spreads for deposit and wholesale funding.

The Reserve Bank estimated those increased spreads had offset 100 to 150 basis points of the reductions in the OCR.

"The factors influencing the banks' pricing decisions are complex and involve a range of trade-offs. On the one hand, banks must ensure that they earn an adequate rate of return on lending to reflect the underlying credit risks," the analysis said.

"On the other hand, if margins on loans are expanded unduly, this is likely to carry costs for the macro-economy and can hinder the efforts of monetary policy to stimulate economic activity."

- NZPA