Bernard Hickey: Kiwibank's foreign borrowing splurge

Kiwibank is importing Europe's loose monetary policy so it can keep growing as fast as possible. File photo / Supplied

Kiwibank has revealed it borrowed $927 million on short term 'hot' European money markets in the space of five months and has quickly lent on much of it into New Zealand's housing market.

Isn't this exactly the sort of thing the IMF has told us not to do?

Our state owned bank is borrowing heavily and cheaply in the hot European money markets (the ones that could blow up at any moment) and then funneling back into the New Zealand housing market.

Kiwibank was the second biggest mortgage lender in the March quarter, only just behind BNZ.

It is offering cheap mortgage rates and has decided not to compete as hard with the Aussie banks for term deposit funding. That's because it can borrow the money much cheaper offshore.

Kiwibank might argue this is an unintended consequence of the Reserve Bank's Core Funding Ratio policy, which forces the Aussie banks to raise more local and longer term funding.

Until now Kiwibank has been able to get hold of local term deposit funds more cheaply. Now it has to compete a lot harder.

Essentially what is happening here is Kiwibank is importing Europe's loose monetary policy so it can keep growing lending as fast as possible.

How does this help New Zealand? It increases our foreign debt. It further pumps credit into an already pumped up housing market. It makes us more vulnerable to a meltdown on European financial markets.

It subverts the Reserve Bank's monetary policy. It encourages borrowing and discourages saving, by keeping term deposit rates lower than they otherwise would be.

This helps push up the New Zealand dollar and restrain our export sector.

The actions of the state-owned bank fly directly in the face of the government's avowed policy of trying to encourage savings and exporting, while discourage borrowing and spending in the housing market.

Why is Kiwibank doing this and putting taxpayer capital at risk in the process?