Bank fixed-lending rates 'reasonable', floating rates could fall

New Zealand banks' pricing of fixed-rate loans is "reasonable" given the cost of funds though there is room for lenders to reduce floating-rate products, according to the central bank.

Monday, July 6th 2009, 11:46AM

In a report on bank funding costs and margins, the Reserve Bank of New Zealand (RBNZ) concludes that a large part of its cuts to the official cash rate have been passed on to households and businesses.

Still, the spreads between marginal funding costs and floating mortgage rates have widened in recent months to "historically high levels."

The RBNZ said it is continuing to have discussions with lenders about their funding and pricing.

"On balance, we believe the pricing of banks' fixed-rate lending products is reasonable given the underlying cost of funds and taking into account the margins typically earned on these products over time," the RBNZ said in a statement today.

For floating rates, "there is some scope for further reductions in these rates without compromising the viability of this lending."

Lending rates have proved a contentious issue for banks, amid criticism they haven't passed on all of the central bank's 575 basis points of cuts to the official cash rate since July last year.

Amid criticism from politicians, labour unions, manufacturers and farmers, the banks have been at pains to explain how funding costs for much of their lending books are driven by overseas rates and the need to compete for deposits against government-guaranteed finance company offerings.

The RBNZ estimates about 100 basis points to 150 basis points of the OCR cuts have been offset by higher marginal funding costs for deposit and wholesale funding.

Finance companies are now lobbying the government to make its decision on whether to extend the retail deposit guarantee scheme, set to expire in October next year, amid concern the cut off will distort pricing.

The Parliament's Finance and Expenditure Committee this month decided against pursuing an inquiry into retail interest rate margins after National, ACT and Maori Party MPs shot down the proposal.

The government softened its stance on mortgage rates after the major banks defended their positions, and the FEC backed down on threats to launch an inquiry into banking practices.

The committee also decided by majority against initiating an inquiry into the relationship between the OCR and short-term interest rates after a briefing from the Reserve Bank.

The RBNZ recently announced its new prudential liquidity policy, which sets minimum liquidity levels for lenders to maintain.

The central bank said the new liquidity policy isn't expected to have a significant further impact on banks' cost of funds because some are already meeting the required core funding ratio and the rest will have a two-year transition period.

To read the RBNZ release in full, click here.

(Businesswire)

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