Retail interest rates do not have space to fall: Commentators

Friday, 14 October 2016

Don't hold on for a cheaper interest rate, borrowers are being warned.

Interest rates on offer from Kiwi banks are about as low as they are going to go, experts predict.

Reserve Bank assistant governor John McDermott told a meeting of the Employers and Manufacturers Association this week that more cuts to the official cash rate were likely.

It is at 2 per cent.

'Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,' he said.

While that might sound like good news for borrowers, commentators are warning it is not so straight forward.

ANZ chief economist Cameron Bagrie said banks needed to do something to get more deposits in, to provide a steady supply of locally-sourced money. That would limit how much rates could move.

'There is a natural limit as to how low deposit rates can go,' he said.

'Credit growth is massively outstripping deposit growth and that's unsustainable. We need deposit growth to lift and lending to slow. I expect we will see intense competition for deposits over the next six to 12 months.'

He said if deposit rates could not fall, or there was competitive pressure for them to increase, the rates charged to borrowers would be expected to follow.

This week, the median one-year rate on offer from the banks is 4.69 per cent. On a five-year term, borrowers pay 5.15 per cent. So far this month four banks have increase their fixed rates - when The Co-Operative Bank announced its changes, it said pressure on term deposits had prompted its move.

Benje Patterson, of Infometrics, agreed there was little room for rates to drop.

He said the wholesale rates available in international markets created a floor under New Zealand rates.

'It has been a bit of an unusual time recently in the banking sector following the Reserve Bank's cut of the official cash rate by 25 basis points to 2 per cent. Instead of playing ball and passing on this cut to mortgage holders and other borrowers, the major retail banks, with the notable exception of Kiwibank, passed on mere crumbs and, intriguingly, lifted the interest rates they offer to term depositors,' he said.

BNZ chief economist Tony Alexander said, if he were borrowing, he would split a mortgage between floating, two- and three-year terms.