The mortgage-free Governor of the Reserve Bank of NZ, Adrian Orr, says inflation is ‘evil’. In this extensive interview, he discusses his plan to reduce interest rates and his regrets.
ANALYSIS
As banks keep lifting mortgage rates, and the sector’s net interest margin (a measure of profitability) hits a 17-year high, one might be forgiven for asking whether their moves are legitimate or opportunistic.
Getting to the bottom of the matter is something a team of experts atthe Commerce Commission will spend a year or so examining.
But at face value, one could conclude there are legitimate factors putting upward pressure on mortgage rates.
Whether or not banks are using these factors to hike rates by more than would be expected in a competitive market is the question that’s more difficult to answer.
Banks get funding from different sources – those who put money in banks and financial institutions around the world that lend banks money.
Throughout 2021 and 2022, banks could also borrow limited sums of “freshly created” money from the Reserve Bank of New Zealand (RBNZ) as a part of its Covid-era Funding for Lending Programme.
The amount banks need to pay – either depositors or those that lend them money – varies depending on both global and domestic factors.
Milford Asset Management trader Brad Litt believed a number of these factors – global ones in particular – were lifting banks’ funding costs.
He noted that while the OCR has been on hold at 5.5 per cent since May, the RBNZ in August suggested there was a small chance it might hike the rate again.
It also projected the OCR would only be cut in early-2025, rather than late-2024, as previously expected.
And, the RBNZ changed its view on what level of OCR it believed was neither stimulatory nor contractionary. It believed the OCR would be “neutral” at 2.25 per cent, rather than 2 per cent.
While seemingly subtle, these revisions are putting upward pressure on mortgage rates.
Reserve Bank Governor Adrian Orr has kept the official cash rate on hold at 5.5 per cent since May. Photo / Mark Mitchell
Looking offshore, Litt noted events in the United States were affecting the wholesale interest rates banks pay.
Because the US Government is expected to have larger budget deficits, it will need to issue more debt.
Accordingly, (much like the New Zealand Government) it may have to pay investors higher rates of interest to ensure they buy all this debt.
Indeed, Litt noted the yield on the US 10-year Government Bond had risen by about 50 basis pointsover the past three months.
Adding to the supply of US Government Bonds in the market, he noted Japanese and Chinese authorities were believed to be selling these bonds for foreign exchange reasons.
Meanwhile, the US Treasury is having to issue debt to meet its obligations as the pile of government bonds the Federal Reserve bought as a part of its Covid-era “money printing” programme mature.
Again, these factors are indirectly putting upward pressure on mortgage rates in New Zealand.
But it isn’t all bad news for borrowers.
Litt believed: “The drag higher in offshore rates, and impact on local mortgage rates, may have done its dash for now.
“Unless there is further resurgence higher in global rates, or isolated shocks to the New Zealand economy, we consider that mortgage rates in New Zealand may have reached their peak.”
Now for the question of whether banks are hiking their mortgage rates more than they need to.
The chief executive of Squirrel mortgage broking firm, David Cunningham, believed they were.
He said all it takes is one big bank – recently it’s been ASB – to hike rates, for the others to follow.
Massey University School of Economics and Finance professor David Tripe said one could look at the difference between swap rates and mortgage rates to get a sense of whether banks are creaming it.
The difference between the average weekly two-year swap rate and two-year mortgage rate has oscillated since just before the RBNZ stopped hiking the OCR in late-May (according to maths done by the Herald, using data published by interest.co.nz).
For example, there was a 1.46 percentage point difference between the two rates in mid-May – the average two-year mortgage rate was 6.52 per cent and the average two-year swap rate was 5.06 per cent.
This margin fell to 1 percentage point in early July, before rising to 1.20 and eventually 1.38 percentage points by early September.
The Commerce Commission will be better resourced, and have access to more data, to do this kind of analysis more thoroughly to (hopefully) draw more definitive conclusions.
Coming back to Tripe, he echoed what other commentators have been saying in recent months that banks’ net interest margins should start to fall, particularly as more people cotton on to the fact they can earn decent amounts of interest by shifting their money from transaction accounts to term deposits or special savings accounts.
The Commerce Commission better ask questions if the current spike in the banking sector’s net interest margin doesn’t fall as the economic cycle evolves.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
