Why aren't the banks cutting their floating mortgage rates?

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The banks are competing fiercely over fixed-rate mortgages but none have cut their floating rates.

Wednesday, May 16th 2012, 2:46PM 7 Comments

by Jenny Ruth

ANZ National Bank and Kiwibank have "specials" on their one-year rates at 4.55% and 4.99% respectively and the other major banks are sitting around 5.25% compared with 5.65% previously - Bank of New Zealand has chosen to offer a discounted 5.1% 18-month rate instead.

But most banks' floating rates are still around the 5.65% to 5.75% area where they've been sitting since March last year.

"It's probably because (hardly anyone) is actually fixing," says Darren Gibbs, an economist at Deutsche Bank.

"Obviously, when you've got two-thirds of your book floating, the cost of cutting floating is so much greater," Gibbs says.

Peter Cavanaugh at Bancorp Treasury Services says there hasn't been any interruption yet in the noticeable shift towards floating rates - according to Reserve Bank figures, 62.6% of mortgages were floating at the end of March, up from 31.2% in March 2010.

One of the banks' motivations might be "it's a lot harder to switch banks if you've got a fixed-rate mortgage," Cavanaugh says.

And of course, as the banks have been reporting for some time now, floating rate mortgages are more profitable than fixed-rate mortgages.

Wholesale interest rate markets suggest there's some room for banks to cut - the market has priced in 30 basis points worth of cuts in the central bank's official cash rate (OCR) by September, although the 90-day bank bills, from which floating rate mortgages are priced, have dropped about 14 points since early April.

David Tripe, head of banking studies at Massey University, says whether the banks will cut their floating rates will depend on what happens internationally and how much that affects bank funding costs.

In the meantime, "if there's going to be any effect, it's going to be reflected in a greater willingness to discount."

Gareth Kiernan at Infometrics, who had been predicting an OCR cut as soon as June before the New Zealand dollar began to slide, agrees recent very public calls for customers to demand lower floating rates than the banks are advertising are likely to keep banks cautious about cutting floating rates.

Even with the currency fall, Kiernan still thinks there's a case to be made for an OCR cut with the weak labour market, softening housing market data and the sharp drop in commodity prices.

Chris Green at First NZ Capital, who thinks the chance of a rate cut is now just 25%, says dairy prices have dropped 46.5% from their March 2011 peak in New Zealand dollar terms.

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