Mortgage banks play possum

Ever since the Reserve Bank last raised interest rates back on 15 May, the five major home lenders have been playing a game of possum.

Monday, May 27th 2002, 4:41PM

by Jenny Ruth

The Reserve Bank raised its official cash rate from 5.25% to 5.5%.

It wasn’t until a whole week later that Bank of New Zealand was the first to blink, raising its floating mortgage rate from 7.5% to 7.75%. It was quickly matched last Wednesday by ANZ Bank and ASB Bank followed on Thursday morning.

WestpacTrust had led the pack on the previous two round of rate rises but only on Friday did it match the other three.

As of the end of Friday, National Bank was the holdout, as far as Goodreturns could tell. The other banks tend to issue press releases when they alter their floating mortgage rates. Spokeswoman Cynthia Brophy is frank: National Bank only issues press releases when it lowers its floating rate. Its web site is still showing a 7.5% floating rate.

The way the major mortgage lenders react here is in stark contrast to what happens in Australia. There the banks, and remember the Australians control four of the five New Zealand majors, move in lockstep with Reserve Bank of Australia (RBA) moves. If the RBA moves its cash rate, the major banks always follow within hours by precisely the same amount.

That’s irrespective of what happens in wholesale markets, which tend to anticipate central bank action.

Just look at what’s happened with New Zealand’s central bank moves this year. Back in March, when the Reserve Bank surprised most economists and first raised its official cash rate (OCR) from 4.75% to 5%, the banks were on the back foot.

Then, five major banks’ floating rates were 6.7%. But the 90-day bank bill rate, the key wholesale rate the banks price their floating rates from, were trading at 5.9% immediately after central bank’s move.

Generally, the banks aim to price their floating rates between 150 and 200 basis points above the 90-day bank bill rate. Clearly, they were then lagging the market.

The response from all five lenders was to raise their floating rates by double the central bank’s move to 7.2%. The 90-day bank bill rate had risen about 70 basis points since the last time they had adjusted their variable rates.

So, when the central bank made its second move, raising the OCR to 5.25% on 17 April, the banks were still behind the eight-ball.

The banks responded by raising their fixed rates by 5 basis points more than the central bank’s move, all five lifting their floating rates by 30 points to 7.5%.

But between the first and third central bank moves, the 90-day bank bills traded between 5.7% and 5.9%, so the banks had already caught up and the pressure on bank margins was no longer there.

One economist, who doesn’t want to be named, says what probably tipped the balance in favour of raising the floating rate was the expectation that the Reserve Bank will be raising its OCR again soon.

And although National Bank could make marketing hay out of not raising its floating rate, it won’t want to risk being caught out by the wholesale market rising, he says.

The latest Reuters polls has 12 of 13 economists surveyed expecting a 25 basis point rise in the OCR when the Reserve Bank next reviews it on 3 July, but the market is clearly already anticipating a further rise when the next monetary policy statement is released in August.

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