Reserve Bank needs to tell Govt solutions, says Key

Finance Minister Bill English. Photo/Mark Mitchell

The Government was stuck in an arm wrestle between the Reserve Bank and banks over mortgage rates and it was up to the Reserve Bank to come up with solutions, Prime Minister John Key said yesterday.

Finance Minister Bill English today added that deposit rates could be hit if interest rates were interfered with.

The Reserve Bank again yesterday raised concerns at the level of interest banks were charging on floating rate mortgages.

In an analysis report of interest rate margins, the Reserve Bank said the pricing of floating rate mortgages appeared "unusually" high in recent months.

Key said the Reserve Bank had a point, but on the other side of the "arm wrestle", the banks said the rates represented the cost to them of raising money.

"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 the banks should listen carefully to what the Reserve Bank are saying," said Key.

Key said the Reserve Bank had long held the view that floating rate mortgages were too high.

"This is the time to start moving to solutions. If the Reserve Bank has some ... present them to the Government."

Key said it was important to remember that unlike many countries, the banks in New Zealand were still viable, open for business and lending.

In a select committee report last month, MPs lashed out at banks for failing to reduce mortgage rates, for protecting their profits, and, in the case of Australian institutions, for treating New Zealand firms differently.

Government MPs last week voted down holding another inquiry into the banking system.

Labour's finance spokesman David Cunliffe said the Reserve Bank report showed that the inquiry was needed to find out why rates were so high.

Key said a parliamentary inquiry was not necessary and the Reserve Bank was in the best position to understand the issues.

English told Radio New Zealand this morning the Reserve Bank's report yesterday was well-researched.

"Which I think will be better than what a select committee inquiry could come up with. And now it's a question of what can happen in addition to what customers are doing."

English has repeated his encouragement for consumers to change banks if they were unhappy with the rates they were getting.

But he believed banks did listen to the Reserve Bank.

"Our hope is that the commercial banks are listening, there isn't one particular lever that anyone can pull to get interest rates lower."

Interest rate reductions had been passed on more than in some other countries, he said.

Improved deposit rates were welcome and English hoped that would encourage savings.

"We've just got to be a bit careful about pulling a lever because we could end up punishing savers who, for the first time in a long time, are doing quite a bit better than the cash rate."

English said people were reacting to the ongoing recession by saving more and spending less.

"These are things that in the long run need to happen in the New Zealand economy."

Many people also felt insecure in their jobs as the unemployment rate increased.

Banks were reporting an increase in non-performing loans.

"This is what you would expect in an economy that's contracting where the forecast on unemployment has always indicated there was going to be a pretty tough year in 2009."

People were showing resilience, he said, and the Government was preparing the ground for recovery and long-term growth.