The Reserve Bank is expected to cut the Official Cash Rate by 25 basis points to 2 per cent next Thursday, and some think it could even cut it by 50 basis points if it is serious about getting the currency down and meeting its inflation targets.

Normally the banks would just fall into line and pass on the cut to mortgage borrowers and term-deposit savers, but this time is likely to be different - and that is a good thing.

The banks could choose not to pass on much or any of it to floating mortgage rate borrowers and those refixing their mortgages or rolling over their term deposits.

They have already started doing this.


The banks collectively have passed on only about 35 basis points of the 50 basis points of two OCR cuts since December.

They have passed on only about half of the 70 basis points of falls in two-year wholesale "swap" rates to their advertised two-year fixed mortgage rates.

They have done this for two reasons.

Firstly, their borrowing costs on international wholesale markets have increased slightly.

It's hard to tell exactly how much by and how much can it be justifiably passed on, but there has been some increase.

Secondly, the banks want to lift their profit margins to build up their stocks of capital in preparation for losses on dairy loans and because regulators here and in Australia want them to hold more capital to back their mortgages.

This is bad news from a borrower's point of view, but could turn out to be good news for savers.

ANZ CEO David Hisco essentially called for a truce last month between the banks over their intense competition for mortgage customers over the past three-four years, and in particular for rental property investors.

ANZ has been among the most aggressive, particularly in Auckland, but Hisco called time on the battle when he said the housing market looked overcooked and that he would like to see the Reserve Bank require all landlords to have a 60 per cent deposit, rather than the 40 per cent proposed by the regulator from September 1.

ANZ's economists also banged the drum this week about the potential for banks not to pass much of it on, either to term depositors or savers.

They pointed out mortgage lending was growing significantly faster than term deposits for the first time since the Global Financial Crisis.

That means banks are having to go overseas to borrow to fund the extra mortgages, which our credit rating agencies and the Reserve Bank are not keen on.

One way to encourage more saving and less borrowing is to not cut rates for either.

The Reserve Bank is stuck between a housing market inflating at double-digit rates and a Consumer Price Index inflating significantly less than the Reserve Bank is supposed to target.

CPI inflation of 0.4 per cent is well below the 2 per cent mid-point of the bank's target band and has been for over four years.

This week's figures show wages grew in the June quarter at their slowest rate in six years, which only reinforced the conundrum.

The Reserve Bank should be cutting the OCR aggressively to get the currency down and inflation back up again, but is worried big rate cuts could worsen the financial stability risks building inside the housing market.

The banks could help savers and give the Reserve Bank more breathing room by not passing on much or any of next Thursday's rate cut to both borrowers and savers.

It will help them build bigger buffers for the losses to come and reduce the risks a future Global Financial Crisis could freeze a significant chunk of bank funding.

Borrowers will not love it, but the economy and the banking system would be better off if the banks chose not to pass it on.