Editorial: Passing through the cuts? Time to keep a close eye on bank rates

Banks have seen their margins rise. Photos / NZME

EDITORIAL

As the Reserve Bank takes the axe to the Official Cash Rate (OCR), all eyes are turning to commercial bank rates.

Borrowers and savers alike are wondering how best to fix their positions.

Are the cuts being passed through? And why does it always seem like deposit rates fall further and more quickly than mortgage rates?

The economic landscape has changed dramatically in a few short months.

Inflation has subsided and there are signs of renewed confidence about the year ahead in business and consumer surveys.

But economic growth is missing in action. Business failures are still on the rise and unemployment is expected to continue climbing until at least the middle of next year.

The OCR cuts are expected to keep coming. Markets have a 50-basis-point cut priced in for November and talk has turned to the odds that we’ll see the Reserve Bank (RBNZ) cut by 75 basis points.

Economists are looking ahead to where the OCR will land. There is a spread of picks from 3.5% to as low as 2.25%.

How quickly and competitively our big commercial banks can pass through lower interest rates to borrowers will have a large bearing on New Zealand’s economic turnaround story in the coming months.

The Herald’s Wellington business editor Jenée Tibshraeny has recently written on the issue.

She cites banking experts, like former RBNZ deputy governor Grant Spencer and Massey University associate professor Claire Matthews, who argue that changes of direction in monetary policy can create opportunities for banks to line their pockets.

With the OCR on the way down, there is potential for banks to receive relatively more interest from borrowers than they pay savers.

She notes that – according to the latest available RBNZ data – this started happening in August when the first OCR cut in this easing cycle was made.

The average interest rate banks collectively received on the stock of all the home loans they had on issue continued to rise during the month to 6.37%.

However, the average interest rate banks paid for all their deposits fell to 4.34% – 3.66% for call accounts and 5.84% for term deposits.

We’ve seen plenty of marketing moves and attempts to grab media headlines from banks with carefully timed and targeted cuts to mortgage rates.

But cuts to deposit rates tend to fly under the radar.

There’s a lot going on in the market right now and that means greater scrutiny is required.

The Reserve Bank produces detailed data in time and hasn’t been afraid to deliver the retail banks a verbal volley at times.

But it is also an issue for the Commerce Commission – to ensure the market is truly competitive and consumers are well served.

In time, rates will settle at lower levels.

With higher wholesale rates, it can be easier for banks to find an extra basis point or two to bolster lending returns.

Bank average net interest margins rose to 2.35% in the June quarter. In the June quarter of last year, that hit 2.38% – the highest level in 17 years.

As rates settle at lower levels we should expect to see bank margins fall. But that doesn’t mean profits need to. In fact, if things go well and we see an economic rebound then banks should do well as investment activity – in both business and the housing market – starts to pick up.

That could be a win-win.