The OCR has dropped from a peak of 5.5% to 3.75%.
At the same time, one-year home loan rates have moved from an average special of about 7.3% for one- and two-year fixes to 4.99% for two years.
Some commentators said Orr was on the right track in pointing out that rates could drop further and faster if banks were willing to give up their margin.
The Reserve Bank reports margin by quarter and said in the September 2024 quarter, the margin at the big banks was 2.4%, except at Westpac, where it was 2.5%.
The Reserve Bank of Australia, in contrast, said its big banks' net interest margins (Nims) were below 2%.
The way banks report their own Nims is different, but indicates an increase.
ASB said its net interest margin increased nine basis points in the half-year ended December.
Only Westpac responded to a request for comment, noting its margin was the lowest of the five biggest banks, by the banks' calculation. The New Zealand Banking Association did not want to comment.
Squirrel chief executive David Cunningham said he agreed that banks could lower their margins.
“The thing holding home loan rates up is still term deposit rates. The six-month term deposit is 4.3% at ANZ to 4.75% at Kiwibank for seven months. The wholesale rate for six months is 3.6%. Bank margins in New Zealand are running about 0.3% higher than pre-Covid and the long-term margin trend is firmly downwards. But are bankers in NZ going to take a 30bps to 50bps hit to margin? The only thing that would do that is competition – but with the big four all Australian-owned, they all have the same incentive to maintain higher margins. It’s called an oligopoly.”
‘The question is why are they charging this big margin?’
Simplicity chief economist Shamubeel Eaqub said when the banks were competing hard for mortgage business, the difference between swap rates and mortgage rates had fallen as low as 80 basis points.
At the moment, the difference between a one-year swap rate and one-year mortgage rate is as much as 200 basis points.
“If markets were competitive it would be a lot lower,” Eaqub said.
“Essentially the question is: why are they charging this big margin? If they’re making all this money, what are they making the money for?”
He said the banks seemed to price relative to each other. “I don’t think we have a working competitive market when it comes to price.”
Infometrics chief forecaster Gareth Kiernan said trying to understand bank margins was “an incredibly opaque exercise”.
But he said looking at swap rates compared to retail rates, margins were higher than they were in 2022 and 2023 but still low by pre-Covid standards.
“I’m not sure that comparing to the pandemic years is appropriate given the other cheap funding sources that were available and the fact that the economy and financial markets were not operating entirely normally then.”
He said that comparing term deposit rates and mortgage rates, margins had dropped.
“Margins were, if anything, unusually high between mid-2020 and the end of 2022, but then fell away as monetary conditions returned to something like normal.
“Apart from a bit of a tick up in four-year and five-year margins over the last six months, there’s nothing there that suggests to me that these margins are particularly high either.
“It’s a slightly different question if one believes that the banking sector is not competitive enough and that bank margins and profits are too high on an ongoing basis – the sort of thing that the Government, Commerce Commission, or general critics of the banking sector talk about. In this case, however, I’d suggest that Adrian Orr is talking about margins having room to fall given the current competitive make-up of the industry, but I’m not convinced the numbers show that.”
He said it was odd that Orr was reported as saying competition would increase as demand for lending grew.
“Simple demand and supply economics states that, if demand for lending grows, due to there being more buyers in the housing market for example, then banks don’t need to compete as much to meet their lending targets – so there is in fact a tendency towards less competition and higher margins or prices – higher interest rates in this case. I accept there can be other factors that might lead to more competitive pricing, such as a bank particularly looking to increase its market share. But I really struggle with the implied logic.”
So what does it mean for rates?
Cunningham said Orr had been clear that the OCR would be cut by 25 basis points on April 9 and May 25 and again by the end of the year.
“He was clear that once they get to neutral – which they’ve said is around 3% – the best outcome is that they sit there for a few years. That will be because inflation will be stable at around 2%.
“He was also very clear that the short-term spike in inflation in this quarter – mainly petrol prices – will be ‘looked through’. He is clearly very comfortable that the job is done, with the last 75bps of cuts to get to a ‘steady state’. Most notably, non-tradeable inflation is falling.”
Cunningham said it was likely there would be a one-year rate below 5% this year.
Eaqub said fixed-term rates might not have a lot further to fall because much of the movement had already been priced in.
