KEY POINTS:
Mortgage and other retail interest rates may have further to rise, even though the Reserve Bank is poised to cut its official cash rate, the Bank of New Zealand warns.
The reason is the ongoing global credit crunch, combined with New Zealand's "terrible" national savings rate which leaves it heavily reliant on imported credit.
Reserve Bank figures show about a third of banks' funding comes from overseas sources.
It is more expensive than domestic funding. Between 1999 and 2004, banks were paying about 100 basis points (or one percentage point) more for overseas funding than the equivalent domestic wholesale rate.
That spread or margin narrowed during the global liquidity boom which followed and that allowed them to offer cheaper fixed-rate home loans, even as the Reserve Bank was raising its OCR in a bid to hose down an overheating domestic economy.
But since the onset of the global credit crisis late last year the spread has widened again, and overseas funding is now around 150 basis points higher than equivalent local funding.
And the local rate is also high by the standards of the past 10 years.
"Passing on those increased funding costs remains a work in progress," BNZ head of research StephenToplis said.
And some particularly large volumes of funding are coming up for refinancing.
"Much of the existing funding that banks will need to roll over during the coming 12 to 24 months is related to times when customer demand for funds, especially mortgages, was running strong," said Toplis.
All of this would hit a bank's overall funding costs hard, increasing the average interest rate it pays for the wholesale funds on its books.
And banks could not be expected to see their interest margins squeezed when the economy was slowing fast and the risk of borrowers defaulting was correspondingly increasing.
"The other issue which is compounding the interest rate pressure at the moment is the cyclical reluctance by the banking sector to lend and a desire for higher margins to compensate for risk."
The result is that borrowers expecting some interest rate relief when the Reserve Bank starts easing, which could be as early as next week, are likely to be disappointed.
"We are all flying a bit blind," Toplis said. "We know what is happening to our funding costs now, but how long will this credit crisis last?
"But right here and now if the Reserve Bank was to cut its official cash rate by 50 basis points, that would not necessarily result in any drop in [retail lending] rates."
It is the flipside of the problem the Reserve Bank had when it was trying to tighten but gaining little traction in the mortgage belt, while inflicting collateral damage on exporters through the high exchange rate.
"The central bank will soon be easing, but don't expect that to show up in you back pocket yet for some time yet - more likely next year than this year."
