Interest rates could rise on the back of increased funding costs for banks, the Reserve Bank has warned.

The central bank which today kept the official cash rate on hold at 1.75 per cent outlined concerns about the impact of US dollar funding pressures on New Zealand banks as part of its quarterly monetary policy statement.

"The cost of borrowing US dollars at short terms has increased markedly since the February Statement," it said in the report.

"Corporates in New Zealand and abroad use these markets to raise US dollars before swapping back to their local currency."


The statement said that for New Zealand banks higher US dollar borrowing costs typically increased their cost of funds which could flow through to increased retail interest rates.

That could mean higher rates for home-loan borrowers.

The Reserve Bank said so far the impact on funding costs for banks appeared to be modest.

"New Zealand banks appear to have been largely resilient to US dollar funding pressures thus far.

"Banks are well positioned, having reduced their reliance on short-term wholesale funding over recent years.

"The lack of spill over also reflects that bank balance sheets are well funded at present."

The central bank also noted there had been a rise in domestic term deposits, while demand for credit from households and businesses had fallen.

But it warned that if funding costs continued to rise it could put more pressure on the banks.


"The cost of swapping offshore funding into New Zealand dollars has increased by up to 15 basis points (depending on the term) since the beginning of the year.

"If this trend continues, it is likely to put pressure on banks' net interest margins, and it is possible that retail interest rates could rise."

ANZ, BNZ and Westpac all reported net interest margin increases in their recent half-year profit announcements, but that period ended on March 31 meaning it only included a short period when funding costs began to rise.

Reserve Bank governor Adrian Orr says the central bank is concerned about the high levels of debt held by New Zealand households. Photo / Dean Purcell
Reserve Bank governor Adrian Orr says the central bank is concerned about the high levels of debt held by New Zealand households. Photo / Dean Purcell

In a media briefing after the release of the statement Reserve Bank governor Adrian Orr pointed to the competitive nature of the banking sector holding rates in check.

"The banking sector is very competitive and so being able to just simply pass on those costs can't just happen like that. The competition in the banking sector is a really key feature for us...but that is not to say they won't pass it on."

Orr said if banks passed on the costs into higher interest rates the central bank might have more work to do than otherwise.

Asked if it could lead to a cut in the official cash rate Orr said it would have to reassess that if it happened depending on what else was happening in the world.

Orr said the central bank remained concerned about the high levels of debt held by New Zealand households and it had been talking "very bluntly" with the banks around their responsible lending behaviours.

But he also reminded that it was not the banks which came out of it wearing the debt but consumers who borrowed the money.

"Some of the wisest words I've heard from a staffer here is a loan offer is not financial advice."

Orr also responded to questions about the Australia banking inquiry saying the Reserve Bank had not been vocal enough in what it did to monitor the banks.

"What I think this institution has been suffering from is a lack of open dialogue around what we have been doing for a long period of time and instead we have let the banks and commentators own that space and not us."

"We have been working very, very hard and you have heard the squeaky wheels from our hard work come from those who are being worked hard around adequate capital, an ability to have open bank resolutions and how they are behaving with regard to their lending and most importantly the role of New Zealand directors."

Orr said the banks were New Zealand licensed and registered institutions.

"They may be owned from offshore but they [are] here to do business in New Zealand for New Zealanders and when they attest, they attest to New Zealand law.

"We have been working on them for a long period of time."

Orr said the Australian Royal Commission had thrown up all sorts of noise but the Reserve Bank was doing its job and had upped the pressure on the banks and was trying to get at the culture.

"We are saying the culture of New Zealand banks has to be for New Zealand and consistent with our laws and regulations."

The Reserve Bank alongside the Financial Markets Authority has asked New Zealand banks to show it how they are different from the behaviour seen in Australia.

Orr said: "I think a cultural check, and if needed a cultural readjustment is extremely timely."