Key open to Reserve Bank advice on rates

John Key

The Government will consider any Reserve Bank proposals on how to get banks to trim floating mortgage rates - which the central bank has again said appear to be "unusually high" - Prime Minister John Key said yesterday.

The Reserve Bank took the unusual step of issuing a statement to clarify its views on banks' interest margins which some commentators, businesses and MPs say are too high and are worsening the impact of the recession.

The Reserve Bank said a large part of its 575 basis points in cuts to the official cash rate (OCR) since July last year had been passed on to household and business borrowers but increases in the cost of bank funding had offset about 100 to 150 basis points of that reduction.

"On balance, we believe the pricing of the banks' fixed-rate lending products is reasonable given the underlying cost of funds and taking into account the margins typically earned on these products over time," the Reserve Bank said.

"However, the pricing of floating-rate mortgages appears unusually high over recent months and we believe there is some scope for further reductions in these rates without compromising the viability of this lending."

Since the Reserve Bank began cutting the OCR from its 8.25 per cent peak to its present level of 2.5 per cent, floating mortgage rates have fallen by 430 basis points and two-year fixed rates by 330 basis points.

While Key said the Government agreed that fixed-rate mortgages were reasonable, it was a matter of some debate about floating rates and the failure of banks to pass on any of the last cut in the OCR.

"If the Reserve Bank has some specific suggestions, then they should bring them to the Minister of Finance for his consideration, but I also think banks should listen carefully to what the Reserve Bank are saying," he said.

He did not think a parliamentary inquiry was necessary, as the Reserve Bank was the regulator and in the best position to understand the issues.

The Reserve Bank also took issue yesterday with a recent Westpac analysis of bank funding costs, saying that while the document "contained useful information" it disagreed with Westpac's use of average funding costs "as an appropriate basis for marginal pricing decisions".

"The interest rate on a bank's latest loan will more likely reflect current marginal funding costs than historical average costs."

The Reserve Bank also said it did not expect its recently released prudential liquidity policy for banks to affect their cost of funds.

It said the banks' own shift into more stable funding sources, including retail deposits, had increased their cost of funds.

Some banks were now already meeting the requirements of the new policy while others had a further two years to comply.

"Accordingly, we do not expect the new liquidity policy to have a significant further impact on the banks' cost of funds."

ROOM TO MOVE

In its analysis of interest rate margins, the Reserve Bank says:

* A large part of its 575 basis point cut to the OCR since July 2008 has been passed on to borrowers, but this has been partially offset by increased costs in bank funding.
* The pricing of banks' fixed-rate lending products is reasonable.
* The pricing of floating-rate mortgages appears unusually high and there is some scope for further reductions.