A less aggressive Reserve Bank posture has influenced some big banks to cut mortgage rates. ZB's Andrew Dickens discusses the issues with the Herald's John Weekes.
Video / NZHerald
Kiwibank is lifting its one-year term deposit rates to more competitive levels, after the Reserve Bank (RBNZ) signalled its intention to keep the official cash rate (OCR) higher for longer.
Kiwibank is raising its one-year rates by 20 basis points to 6.1 per cent for saverswith more than $10,000, and 6 per cent for those with between $5000 and $9999. The offer is available until June 16.
While Rabobank is paying 6.3 per cent and Heartland 6.2 per cent, Kiwibank’s offering is about 10 to 20 basis points above what the bigger banks are paying those with larger amounts of savings.
While traders had been pricing in two OCR cuts for the year, the RBNZ came out saying it considered a hike and would likely only cut the rate in September next year.
The RBNZ’s “tough on inflation” stance prompted markets to temper their expectations a little and price in one cut for November. The statement also sent wholesale interest rates higher.
It is yet to be seen whether Kiwibank’s move was an eye-catching way of putting a popular term of deposit on a more competitive footing, or whether wholesale interest rates will remain elevated for long enough to prompt more widespread retail rate rises.
The backdrop to this is that retail banks have in recent months been cutting their rates a little, on the back of the expectation central banks here and abroad are getting ready to ease monetary conditions.
ANZ senior strategist David Croy on Friday afternoon said, “While we have seen 15 to 20 basis point increases in one- and two-year wholesale rates since the Monetary Policy Statement, that has only taken them back to where they were in the second half of April, and retail rates tend to follow broad trends in wholesale rates, and don’t tend to track wholesale rates from one week to the next.”
The RBNZ’s hawkish MPS prompted some observers to question how serious it was when it suggested it would keep the OCR high for longer than previously expected.
Speaking to the Herald on Friday, RBNZ assistant governor Karen Silk echoed the tone of the statement.
Asked why the RBNZ planned to keep the OCR at around 5.5 per cent until September next year, when it saw the annual inflation rate falling to 3 per cent by September this year, Silk said it was focused on getting the rate to the midpoint of the 1 to 3 per cent target range.
The bank sees the inflation rate hitting 2.2 per cent by September next year, when it believes it’ll finally be ready to cut the OCR.
“The thing is that we are required to get to the middle of that target range, which is 2 per cent, not just to the top of the range,” Silk said.
“And we believe that that is likely to take quite a bit longer.”
Silk also said the RBNZ was wanted to get in the band and stay there, not bounce back out.
Reserve Bank chief economist Paul Conway and assistant governor Karen Silk during the May Monetary Policy Statement press conference. Photo / Mark Mitchell
She said the RBNZ would keep an eye on the composition of the consumers price index – for example, whether higher levels of inflation were mainly domestically driven or imported.
She noted that domestically driven non-tradeable inflation was typically higher than tradeable inflation in New Zealand, but underlined the fact non-tradeable inflation was still too high.
Non-tradeable inflation rose by 5.8 per cent in the year to the March quarter, which was by more than the RBNZ expected. Lower tradeable inflation brought the headline inflation figure down to 4 per cent.
Silk noted high rents, council rates and insurance premiums, which are less sensitive to interest rate changes, were slowing progress in lowering inflation.
However, she believed keeping the OCR higher for longer would eventually ease these price rises.
For example, lower building cost inflation should reduce insurance premium inflation.
Silk accepted high interest rates would hit some parts of the economy harder. For example, higher interest rates lower people’s discretionary spending to the detriment of the hospitality sector.
However, the RBNZ isn’t projecting another technical recession (two quarters of negative gross domestic product growth in a row).
“It’s going to take a period where we end up with a negative level of activity and output to get back to price stability,” Silk said.
“We need demand to continue to come out of the economy.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
